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I had a 401(k) with a previous employer. When I left, I rolled the account over to ShareBuilder and it's been sitting there ever since. I am not making any contributions to this account.

In the last year I've been contributing to the 401(k) through my current employer who has a plan setup through Fidelity. I do this to get the contribution matching.

Should I merge the two or should I leave them alone? Is there a disadvantage to having two? Are there any benefits?

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There's no disadvantage in having two accounts, in fact I'm in the very same situation: I have my old employers' 401(k)s rolled over to an IRA account which I manage myself, while at my current place of work I have a 401(k) that I manage through the employers' plan program.

The problem with employer sponsored 401k is that you're limited on your investments. At least in my case, there's a limited list of funds I can invest with, and thats it. While in IRA I have the full freedom of doing whatever I want with my money.

Also, consider that employer sponsored 401(k)s may not allow rolling older contributions into them, and in this case there's nothing to discuss.

You should check however your particular 401(k), and it may so be that you'd have additional discounts negotiated by your employer which would make investing through that account particularly attractive. In this case you might want to consider merging them.

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More than one account:

Benefits:

  • your old account may have better choices, so keeping it gives you more flexibility.

Disadvantages:

  • Have to keep track of more accounts. Including changes in options over time.
  • Rebalancing calculations and movements are more complex.

One account:

Benefits:

  • Only have to track one account, and one set of rules.
  • Easier rebalancing calculations.

Disadvantages:

  • your old account may have better choices, so keeping it gives you more flexibility.
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If you are in a low bracket, say 12%, and will earn more in the future, there's a case to be made to transfer the funds to an IRA and each year convert just enough to Roth to "top off" the 12% bracket. As income rises, you'll be solidly in the 22% bracket, if not already, and you should then just save pretax, no converting.

Updated to reflect the 2018 tax code, 12%/22% vs 15%/25%

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  • I'm already in the middle of the 25% bracket. What do you suggest? – ILovePaperTowels Feb 15 '12 at 18:56
  • Joe: keep on giving this advice! I have been reading this site for while and realized that I could have saved several thousand dollars in taxes if I had known this earlier. Thanks! – Sean W. Feb 16 '12 at 21:30
  • @SeanW. - The encouragement is much appreciated. The topic is pretty difficult especially since there are so many diffeent situations. – JoeTaxpayer♦ Feb 16 '12 at 22:20
  • @ILovePaperTowels - Keep with pre-tax, until you find you might hit higher brackets at retirement. A job with great pension can push you into another bracket. No harm in depositing a bit to Roth each year to hedge your bet. – JoeTaxpayer♦ Feb 16 '12 at 22:22
  • I'm filling out the form to recharacterize my 2011 Roth IRA contributions to traditional right now. – Sean W. Feb 16 '12 at 22:38
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Additionally, there is a drawback that you may have to pay more in annual custodial fees, both for the account if you keep 2 accounts.

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