I have multiple 401K's because I have worked for multiple companies. How can I consolidate these accounts? One problem is that the company that I prefer in terms of investing flexibility, is not the one which is used by my current company. I am going to incur taxes if I do this? (assuming I even can do it)
You have three options.
- Roll over funds from your former employers 401Ks into the 401K for your current employer. This can only be done if the current employer allows this. Not all do. Some may only limit you to specific types of funds: pre-tax, post-tax, Roth, company match.
- Roll over funds from your former employers into IRAs. You have to make sure that the money from the 401Ks is handled correctly. You will most likely have multiple IRAs depending on what types of funds you are rolling over. The good news is that the IRAs can all be under the same company.
- Leave them the way they are. Some people like to keep them in 401Ks. Others don't.
- The 4th option to move funds into a former employees plan. I have never found a company that allows this.
If you follow the procedures outlined by the IRA trustee there should not be any problems. There will not be any taxes involved, unless as part of the process you change non-Roth funds to Roth funds, or you don't follow the procedures. In my experience the IRA companies know how to handle the transfer. In some cases the check must be sent to you, and then you send it to the IRA company, but they will tell you exactly how the check is to be made out to.
I would start by talking to the IRA trustee they are likely to have seen it all, and can guide you through the process.
401(k)'s can be rolled over into IRAs. You can roll all of your former company 401(k)'s into a single IRA, managed by whatever company you like.
Many employers will not let you transfer money out of your 401(k) while you're still a current employee, though, so you may be stuck with the 401(k) used by your current company until you leave. You'll have to check with your 401(k) administrator to be sure.
You won't incur any taxes as long as you execute the rollovers properly. The best way to do it is to coordinate the transfer directly between your old 401(k) and your new IRA, so the check is never sent directly to you.
You can do this with no problem. What you want is a direct transfer style of rollover. This is simply where the money is transferred from your 401(k) custodian directly to your new IRA custodian. This will ensure there are no taxes or penalties on the balance.
The key is that the money is moving directly to the new account without you having direct access to the balance. This keeps the money out of your hands in the eyes of the IRS. The process should look something like this:
- Establish your IRA account at the financial institution of your choice. This can be an existing IRA account if you have one.
- Tell the IRA administrator that you would like to initialize a direct transfer rollover into that account. They will be able to tell you how to have the check written and where to mail it.
- Contact the administrator for the 401(k) you want to consolidate. They will have to make a check payable to the new institution, and they may be able to mail the check directly to the new institution. This check should not be made out to you or mailed to you, if possible.
- Follow up with your IRA administrator to ensure that they received the check for the correct amount.
- You should receive the tax forms at the end of the year detailing the transaction.
A few notes:
- If the 401(k) administrator requires the check to be in your name, have them make the check out to "[new institution] FBO [your name]". They should be able to do this. Make sure you do not endorse the check, but send it directly to the new administrator within 60 days. The key here is that you cannot deposit this check for direct withdrawal, which avoids IRS penalties and taxes.
- Make sure the IRA account type is correct. For example, you cannot roll traditional 401(k) funds into a ROTH IRA fund without paying the income tax on the balance. If you are moving traditional 401(k) to traditional IRA, you should have no surprises.
You can also roll money from prior 401ks into current 401ks. Call the administrator of the 401k you prefer (i.e., Fidelity/Schwab, whoever the financial institution is). Explain you don't work there anymore and ask if you can roll money into it. Some plans allow this and some don't.
So either, 1) You can roll all your prior 401ks into your current 401k. 2) You might be able to roll all prior 401ks into the prior 401k of your choice if they will accept contributions after you've left. You can't move the amount in your current employer's 401k until you separate or hit a certain age. 3) Like mentioned above, you can roll all prior 401ks into an IRA at any financial institution that will let you set up an IRA.
Process: -Call the financial institutions you want to move the money from. Tell them you want a direct rollover. Have them write the check to the financial institution you are rolling into with your name mentioned but not the beneficiary (i.e., check written to Schwab FBO: John Doe account #12345)
Tax implications: -If you are rolling from a pre-tax 401k to a pre-tax 401k or IRA, and the money goes directly from institution to institution, you are not liable for taxes. You can also roll from a Roth type (already taxed) account into another Roth type account with no tax implications. If they write a check to YOU and you don't put the money in an IRA or 401k within 60 days you will pay ~20% tax and a 10% early withdrawal penalty. That's why it's best to transfer from institution to institution.
401k vs IRA: -This is a personal decision. You could move all your prior 401ks into an IRA you set up for yourself. Generally the limitations of a 401k are the lack of funds to invest in that fit your retirement strategy, or high expense ratios. Be sure to investigate the fees you would pay for trades in an IRA (401k are almost always free) and the expense ratio for funds in your 401k vs funds you might invest in at a broker for your IRA.
Best of both: -You can roll all your 401ks into a single 401k and still set up an IRA or Roth IRA (if your income qualifies) that you can contribute to separately. This could give you flexibility in fund choices if your 401k fees tend to be cheaper while keeping the bulk of your nest egg in low cost mutual funds through an employer account.
Last advice: Even if you don't like the options in your current 401k, make sure you are contributing at least enough to get any employer match.