I sometimes hear the same questions again and again and then I usually write a post about them. This question is not exciting at all, but it comes up several times a week and it could be one you have as well.
Q: Should I rollover my old 401ks and IRAs into one account?
A: This is not really a financial question, but more an administrative one. If your old company is requesting you roll it over, you should. Otherwise, you can roll it over if you want all your retirement accounts in one place, but there is no financial or tax imperative to do so with ONE EXCEPTION.
If your old retirement accounts offer investment options at LOWER FEES, keep your money there. If your new retirement plan (e.g. at your new job) offers lower fees, then roll the money over into your new retirement account.
The fees I’m talking about are the fees you pay for the mutual funds you own. They should be listed in your investment information. If they are not, type the name of the mutual fund into Google along with the word Morningstar and check the Morningstar page under “expense ratio” for the fees. You want your expense ratio to be as low as possible (preferably under 0.60 if possible).
Rollovers can be a pain for a few minutes while you fill out paper work, but because retirement is all about he time value of money… let me repeat – the TIME value of money. The more money you have earning gains or interest over the longest period of TIME, the better off you will be in retirement.
As a result, the lower your fees are in your retirement accounts, the MORE money you have gaining over the longest period of time, which means you have more to live on in retirement.
Therefore, if you can reduce your fees by moving your old 401ks or other qualified retirement accounts to your current retirement accounts manager, you should.
Generally, you should be able to do an institution to institution rollover meaning your old manager can send the funds directly to your new manager and you never have to touch it. This is the best way to do a rollover.
If you absolutely cannot do it this way and you have to actually touch your retirement funds, be careful. The IRS gives you 60 days to replace all the funds into a quoalified account (presumably your new employer or something similar). If you miss that deadline and you are not over age 59.5, you will be on the hook for a 10% penalty and possibly taxes.
Also, taxes are automatically withheld from an IRA/401k distribution if the funds come directly to you and you have to find cash elsewhere in 60 days to replace that which has been withheld. You can see why and institution to institution rollover is preferred.
Do not mess with this. Do an institutional rollover if you want to move your retirement funds to another manager. Remember, you only should switch if you have to (i.e. your former employer is asking you to move your money) or if your new employer’s retirement fund manager has lower fees. Also, make sure you remember and have documentation for all your retirement accounts. Don’t forget where your money is!