What to do with a leftover 401k account?
August 30, 2009 5:27 PM   Subscribe

What to do with a 'leftover' 401k account?

I worked as an intern/co-op for a cumulative 9 months during college at a company that had 401k matching, which I took advantage of while I was there. I've since graduated and moved on to work for another company that does 401k matching and have one there as well.

I have about $1500 in the first 401k account that has been sitting there for the last few years but that I tend to forget about. I am fully vested and don't want to just withdraw it and pay the tax penalty.

I've done basic research into what to do with a 401k, so know my options, but don't really know what makes more sense to do.

Should I, given the market:
(A) Leave it where it is for now
(B) Roll it over into my current 401k
(C) Roll it over into a traditional IRA (and if so, recommendations for an IRA company?)
(D) None of the above (and if so, what?)

I am 24, female, in Arizona, and recently got married (but don't plan on having kids for a couple more years), if that helps.

And yes, YANATP/YANMTP (tax professional). Thanks in advance for the Hive Mind's input!
posted by bookdragoness to Work & Money (9 answers total) 2 users marked this as a favorite
I'm sure someone will chime in with better advice, but I rolled mine over into an IRA. I do almost all of my banking with USAA and they had some attractive IRA options. I just gave them a ring and they helped my pick out a plan that I was comfortable with. My plan now is more aggressive/risky than what I had with the old 401k (I'm in my early twenties as well). The reason I rolled it over is because I prefer having more direct control of my accounts, even if I don't intend on touching it for years. Having it with the same company as a lot of other of my accounts worked for me. In this economy, it's neat to watch things gain by 14%.
posted by lizjohn at 6:08 PM on August 30, 2009

You cannot roll it over to the current 401(k) plan. The only two options are (1) leave it where it is and let the employer continue to control it or (2) roll it over to an IRA where you can control it. The latter is just about always preferable.

I had a very satisfactory experience with Schwab. When I called for assistance at one point, I talked to a real human being. On a Saturday.
posted by yclipse at 6:13 PM on August 30, 2009

Even though it is a small amount now, plan to add to it whenever you can. You are young enough that that can make an enormous difference.
posted by yclipse at 6:14 PM on August 30, 2009

Hmm, now that I'm reading my post again, it sounds like a commercial! I'm not shilling for USAA, I swear.
posted by lizjohn at 6:55 PM on August 30, 2009

Consider also a Roth IRA: pay your taxes now on the $1500, at the time of any future contributions, and then withdraw whatever it has grown to tax free after age 59 1/2 yrs. I've linked to the Wikipedia article but any of the major mutual fund companies such as Fidelity or Schwab should be able to help set it up, if you chose to.
posted by beaning at 6:56 PM on August 30, 2009

Keep in mind the decision between Traditional & Roth IRA depends on your specific income and tax situation. It's "tax me now" (Roth) vs "tax me later" (Traditional).

So the decision comes down to whether you believe your individual tax rate, at retirement age, will be higher or lower than it is now.

Factors affecting this are -
* Tax law changes lowering or increasing taxes in your tax bracket.
* What your income bracket is now, versus what it will be at retirement.

Regardless of which plan you pick, whatever is in it grows tax-free each year. The only difference is whether the money is taxed on the way in (Roth) or on the way out (Traditional) of the plan.

Some people hold both types of IRAs, as the each have annual investment caps.
posted by gomess at 7:52 PM on August 30, 2009

As beaning and gomess point out, a Roth IRA may be a better place for the money that's in your 401K, but it all depends on not only the tax considerations that gomess notes, but also the penalties you would incur now. You will have to pay them to put the money into a Roth, because all money that goes into a Roth has to be "after tax."

Do a back-of-the-envelope calculation: is [$1500- (penalties + income tax now) after 45 years at your expected rate of return] greater or less than [$1500 after 45 years at expected rate of return - (income tax at expected bracket in retirement)

If the loss from penalties is outweighed by the anticipated tax savings, go Roth. If not, go traditional IRA to avoid penalties.
posted by slow graffiti at 8:33 PM on August 30, 2009

Most company 401(k) plans have very expensive, high-fee, poor choices for investments. Any time you change jobs is a golden opportunity to get your money out of those plans and into your own IRA where you have better choices to manage your own portfolio.

My favorite company for holding your IRA is Vanguard which has the lowest cost mutual funds in the industry. Vanguard has a $3000 minimum for most of their funds but the STAR fund, a good balanced investment, has a $1000 minimum for a starter. If you add another $1500 to your IRA this year you would then be eligible to transfer your investment to one of their other funds. The best might be a Target Retirement fund that provides diversification across domestic stocks, international stocks and bonds.
posted by JackFlash at 10:02 PM on August 30, 2009

Pretty sure you can rollover an old 401k into a new one (or a rollover IRA into a 401k - at least thats what Fidelity told me about my current 401k plan).

However I'd just rollover into an IRA. Reasoning that you'll leave your current job at some point too and you'll need someplace to put that money - so good just to have an IRA open that you can roll future 401ks into as well.

I use schwab - they've got great customer service - and tons of no-load no fee funds. My 2c...
posted by jourman2 at 9:15 AM on August 31, 2009

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