An IRA in the hand is worth 2 401ks in the bush?

October 13, 2013 6:25 AM

I just started a new job at a small business that does not have a company-funded 401k plan. I have 3 old 401k accounts of various amounts from previous jobs. What should I do with that money, and how should I fund my retirement now?

Ideally I would have all of those bucks working together in one account instead of dispersed, but I don't know if that's the thing I'm supposed to do, or how to do it. I make a decent amount of money, have a lot of student loans, and financial stability is very important to me. My previous 401ks are set up with retirement date targets around 35 years from now. (sigh)

Please talk me through how to move my money around and where to put it like I'm a 12 year old.

posted by thirdletter to Work & Money (7 answers total)

Just roll them all over into a single IRA, and do a set-it-and-forget-it with a low-fee fund: perhaps a whole market fund, perhaps something like a Vanguard target fund. Whether you want to go Traditional or Roth depends on whether you want to deal with tax now or later, whether you can afford to deal with any tax liability from converting to a Roth IRA, and to some degree what you plan on contributing out of your own pocket while at your new job.
posted by holgate at 6:55 AM on October 13, 2013 [3 favorites]

Call the broker of your choice, I like Fidelity, but Vaguard is good too. Then ask them to help you roll over IRA.

Then set up a regular IRA or a Roth IRA, and fund it regularly.

Congrats on your new gig!
posted by Ruthless Bunny at 7:03 AM on October 13, 2013

Best answer: First of all, this is very common and there's plenty of advice on the internet. The process is known as a "401k rollover." You have three options:

1. If you have more than $5000 in the account, you can leave the money in the 401(k) with your old employer.
2. You can move the old company's 401(k) to a 401(k) with your current employer.
3. You can move the old company's 401(k) to an individual IRA at a financial institution of your choice.

WHAT do you do?

I would recommend option (3) for the following reasons:

- It simplifies your accounts. There's no need to have four 401(k)s. This is why I didn't pick (1).
- A financial institution like Vanguard will have a greater variety of mutual funds for you to invest in than a 401(k) provider. My old 401(k) only had 20 funds, and many of them were pretty bad. This is why I didn't pick (2).

HOW do you do it?

Call up Vanguard (or your financial institution of choice), tell them you're interested in moving your funds over. In my case, they had a rollover specialist that pretty much held my hand through this whole process. It consisted of the following steps:

1. Call up your 401k provider, tell them you want to rollover your money.

2. Your 401(k) provider needs to cut a check for your financial institution (Vanguard in my case). Vanguard will tell you exactly how to make out the check and where to mail it. In my case, the 401(k) provider allowed me to manage the rollover process through their website, so I didn't even have to call them up. It's possible that your 401(k) provider will have to mail YOU the check and YOU will have to mail it to Vanguard.

2b. If you ever have the check in your hand, make sure you send it to your financial institution. DO NOT cash it yourself. If the check is incorrect somehow, you can tell your 401(k) provider to cut you a new check. Sorry to spend so much time on this point, but it's one of those irreversible stupid things that could cause you to lose a lot of money. If you accidentally cash the check at your bank institution, it will count as a distribution (i.e. you'll cash out...). This will incur tax penalties and all sorts of bad stuff.

3. Roth IRA versus regular (non-Roth) IRA: Once you roll it over to an IRA, you can choose to convert it to a Roth IRA. If you choose to convert it, you will have to pay taxes on it come tax time. Make sure you have enough money to do this. You can also roll it over in small amounts to avoid paying the taxes all at once. Vanguard has a page on making this decision, so read up and make up your mind.

4. Vanguard will move the money to a "Money Market Fund" temporarily. This is just a place to keep your $ for the short-term until you decide what specifically you'd like to invest in. (which brings us to step 5...)

5. Choose what you want to invest in. You'll have to login to Vanguard, sell your money market funds, and use that money to buy your retirement funds. This is where you pick funds and asset allocations and all that jazz. I like Vanguard's Target Retirement 20xx funds (if you're looking to cash out in 35 years, you want 2013+35 = approx. 2050)

Obviously, I am not an investment advisor or whatever, so please do your research. Here's where you can find some more info:

Iwillteachyoutoberich's guide to Investment Accounts (Not at all scammy despite the scammy-sounding name!)
Vanguard's guide to rolling over your 401(k)
Fidelity's guide to rolling over your 401(k)
Bogleheads.org guide to Roth IRA conversion
Bogleheads.org guide to IRA rollovers and transfers

If you still have questions after reading, you should feel comfortable calling up Vanguard or Fidelity or whoever. I've only dealt with Vanguard, but they were very helpful and could answer all my dumb questions.
posted by yaymukund at 7:34 AM on October 13, 2013 [16 favorites]

Clarification: In step 4, I said "Vanguard will move the money to a Money Market Fund temporarily."

What I meant was:

Vanguard will move the money to an account (an IRA or Roth IRA) with all of your money invested in a money market fund.

A money market fund is not a type of account, but a type of fund, if that wasn't clear.
posted by yaymukund at 7:47 AM on October 13, 2013

I think putting everything in one place is a good idea.

First, figure out where you want your account to be. Places like Fidelity, Charles Schwab, and Vanguard all have reasonably priced investment services with lots of options. They all offer target date funds.

Next call the investment bank you've chosen and tell them you'd like to open up a rollover IRA. They will be able to give you some guidance and answer any questions.

Call the three companies that have your 401Ks and tell them you'd like to transfer the money to a rollover IRA. They may transfer it directly to the new account, or they may send you a check. If they send you a check, don't cash it! Forward the check directly to the new bank.

Once the rollover IRA is set up with the existing money, it's time for the new money. The new money will be in a separate account. You can choose a traditional IRA or a roth IRA. Traditional IRAs are funded with pre-tax money, but the money is taxed when you withdraw it. Roth IRAs are funded with after tax money, but you are not taxed on the gains when you withdraw it. IRAs have limits on how much you can contribute each year.

In addition to deciding which IRA, figure out what fund you want to start with.If you're not sure, you can always start with a money market fund and exchange it for something else later. You can hold multiple funds and exchange funds within your IRA account. Some funds have a minimum investment amount, so you may need a lump sum to start.

Finally, transfer new money into your roth or traditional IRA. An automatic monthly transfer is a great way to do this.
posted by balacat at 8:21 AM on October 13, 2013

After the rollovers and when you are looking at how much to contribute each year, consider your student loan balance and what you are paying in interest there. Might it be best to pay that off sooner instead of putting that cash toward larger IRA contributions?

I would definitely be making large extra payments toward that student loan principal if I had the funds to do so.
posted by AnOrigamiLife at 11:22 AM on October 13, 2013

I have 4 401(K)'s from employers. The diversification helped me weather the Great Recession reasonably well. so far. I keep meaning to consolidate, and not getting around to it. 2 of the 4 have Socially Responsible fund options, which is important to me, and they've done fine, too.
posted by theora55 at 11:25 AM on October 13, 2013 [1 favorite]