If you’ve contributed money to your 401K at your job, you’ve made the smart and financially responsible choice. However, when you start a new job, you will get a new 401K at your new company. If you don’t take action to roll your old 401K over into your new account (or into an IRA), then you may find yourself with multiple orphaned 401Ks at each of your past employers.
If you are in this situation, it is important that you be proactive and take steps to consolidate your orphaned 401Ks into one account. This can help you to better manage your investments and can save you both time and money.
Why Consolidate Your Orphaned 401Ks
Consolidating your orphaned 401Ks is a simple process as you can simply move the money into your new 401K account or into an IRA. You do need to make sure that the money goes into a qualified tax-deferred retirement account in order to avoid taxes and penalties, but you can complete paperwork to easily do a 401K or IRA transfer and move the money directly into the new account.
So, why go to the trouble to take this step and consolidate your 401Ks? Here are a few reasons:
- You can save money on fees. In some cases and for some type of investments, a fee is charged. If you have money in multiple different 401K accounts, you may be paying multiple different fees. These fees can add up and chip away at the money that you should be saving for your future. By combining your 401K accounts, you can pay just one fee, which is usually much less expensive.
- You can reduce investment costs. When you buy or sell stocks or mutual funds, you usually pay a commission or fee in order to do so. If you have money in different 401K accounts and you want to buy the same stock across multiple accounts, you’d have to pay the fee for every single account where you made the purchase. For example, if there was a $10 charge for buying a stock and you bought the stock in three different accounts, you’d pay $30 instead of $10.
- Some companies waive fees if your account reaches a minimum size. By combining all of your orphaned 401Ks into one, you will reach that minimum size sooner and can avoid paying these fees and costs.
- You can avoid missing minimum distributions. When you get older, the IRS eventually begins to mandate that you take money out of your retirement accounts on a certain schedule. It can be hard to keep track of required minimum distributions on multiple different 401K accounts and you could end up paying penalties if you miss a distribution that you were supposed to have taken. By consolidating your 401Ks, you reduce the chances of that occurring.
There are a lot of important reasons why consolidation makes sense, so you should strongly consider making the choice and moving all of your 401Ks over today.