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Combining my 401(k)s

Financial Planning Dentist

Have you wondered, should I be Combining my 401(k)s? your not alone and we have written the below guide to whether or not its going to be right for you and your strategy.

After a decade working with clients the most frequent questions I received was one of these two questions:

  1. Should I combining my 401(k)s from my previous employer(s)? 
  2. How do I move/consolidate my old 401(k? 

The answer to “Should I combining my 401(k)s” is “YES” for the following reasons:

  1. You’re most likely being charged – When you were an “active” employee your plan administrator (people that hold your 401k) didn’t charge you, however, now that you’re “inactive” employee, you’re probably being charged an annual fee, if not a quarterly one just to have an account. This is standard practice and can cut into your growth over the long term
  2. It may no longer be invested – A lot of plan administrators are required to move your 401(k) into an IRA. This is especially true if your company was acquired or went out of business. When this happens the plan administrator will liquidate all of your investments and move it into cash. So this whole time when you thought it was invested in an Mutual Fund that tracked the SP500 and an International Stock Mutual Fund while the stock market continues to go up and up you haven’t participated in it. 
  3. You aren’t paying attention to it – If you’re still invested you’re probably not investing properly. This is like if with your last oil change, the guy at XYC Oil Change Gas Station didn’t put the sticker on your car to tell you when to do the next oil change. You just kept driving thinking everything was fine when in reality it’s been 15,000 miles and your car is about to die. This is a little dramatic but imagine if you had invested in oil because your grandfather had Exxon his whole life and told you it was the greatest stock in the world. But the reality is it has more than 50% of it’s value in the last year.  Or maybe before you left your last employer you thought the market was too high so you moved it into cash or a bond fund. Regardless of the situation, you need to pay attention to how it’s invested. 
  4. Your investment options are limited – There are probably better investment options with a Rollover or Traditional IRA. Maybe you got a new job and your new employer has a 401k that has good low cost options. Some employers let you have what’s called a Self-Directed Brokerage 401(k), meaning you can buy your own stocks, index funds, ETFs, or Mutual funds at little to no cost.  
  5. If you wait long enough you’ll probably forget about it – Let’s say it’s only a small amount and run the numbers. A $5,000 investment earning 8% per year would be $50,000 in 30 years or what I like to view as 2-3 years of education for your child or a down payment on an investment property.

The answer to “Should I combining” my 401(k)s” is “NO” for two reasons:

  1. With a 401(k) you have creditor protection – Funds held in qualified ERISA plans, like a 401(k), are generally protected from creditors. So if you went bankrupt, there was a court judgement or a creditor came after your assets, then your 401(k) may be protected up to its full value. Unlike with IRAs or Roths (not qualified ERISA plans), assets can be exempted from bankruptcy up to $1,362,800. Creditor Protection 
  2. Backdoor Roth IRA – If you keep your money in a 401k by leaving it there or rolling it into a new 401(k) and don’t have any money in an IRA or Rollover IRA, then you can do what’s called a Backdoor Roth IRA (read our article called Backdoor Roth) and make sure you Follow the Rules 

The Answer to Question 2 You have four options:

  1. Keep the 401(k) with the previous employer – Please review Question 1 for the pros and cons of doing this
  2. Rollover your balance to your new employers 401(k) – Ask your plan administrator at your new employer if their 401(k) plan accepts rollovers. Make sure you understand the plans fees and investment choices before moving forward. 
  3. Rollover your 401(k) into a Traditional IRA or Rollover IRA
    • Request a Direct Rollover from your 401(k) so that you can move your money into an account you have more control over and is all one place (there is no limit to how many 401(k)’s you move into an IRA. If you have 3 previous employers all you need to do is open 1 Traditional IRA or Rollover IRA (if you want to move it into a 401k in the future) and request 3 direct rollovers from your previous 3 companies into this one account. A direct rollover means the check is made out to the company (brokerage firm) where your new IRA is. For example, if I opened an account with Vanguard the check would be made payable to Vanguard for the benefit of (FBO) your name and your account number. This is very important to understand as a Rollover and Direct Rollover have completely different meanings. 
    • A rollover means the check is payable to you and if you don’t put that check back into an account within 60 days then it is a taxable distribution to you and you’ll owe the IRS taxes on that full amount. Also, you’re only allowed to do this once per year. 
  4. Withdraw all of your funds and pay income tax on the entire lump sum (we do not advise unless absolutely necessary) – If you’re looking to take multiple steps back in regards to your retirement plan and want a big pay day and a big tax bill then you’re allowed to take all the money out and put it into the bank. Again, unless you absolutely need this money and even then I am sure there are better alternatives, then we recommend not to do this.

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