You are likely to change jobs 10 to 15 times over the course of your career, based on the national average. Assuming you participate in each of your employers' retirement plans, you could leave behind a trail of accounts, in addition having to your own individual retirement account (IRA).
What's the best strategy for maximizing these retirement funds? Should you consolidate them? Or does it make sense to keep separate accounts?
Here are questions to ask to know when it's best to hold or transfer retirement savings:
1. What are the benefits of consolidating 401(k) accounts into one IRA?
There is no one rule for handling your employee retirement funds, but consolidating your 401(k) accounts into a single IRA will simplify your investing now and when you are ready to retire, according to Jamie Hopkins, an associate professor of taxation at the American College in Bryn Mawr, Pennsylvania, and associate director of its New York Life Center for Retirement Income.
Keep in mind that the Internal Revenue Service requires you to begin taking distributions from most IRAs at 70 1/2, so fewer accounts mean fewer mandatory withdrawals.
"Having all different accounts means you would have to take minimum distributions from each one," Hopkins says. "If you roll them into one IRA, you only have to deal with one account for minimum distribution rules."
2. What are the penalties to cashing out my retirement fund?
Resist the temptation to cash out your 401(k) plan, Hopkins advises. Initially, you will have to pay a 10 percent penalty if you do not roll over the funds into an IRA, but even more important are the tax and savings advantages of keeping the money in a retirement account.
"Because this amount of money is in a special tax vehicle, and is growing at rates you won't get anywhere else, a lot of people don't recognize the value of tax-deferred growth," Hopkins says.
3. What are the costs with an IRA vs. a new 401(k)?
When deciding whether to roll over your 401(k) to your new company's plan or to an IRA, you should weigh the investment costs.
"A lot of people assume a 401(k) or other qualified plans are free for them," Hopkins says. "They are not -- you pay the fees on the accounts. If you go with a low-cost IRA, the fees can be less than a 401(k) plan."
4. Should I rollover my 401(k) into an IRA?
In most instances, you are better off rolling over your 401(k) into a traditional IRA, for which you will pay taxes on the monies when you withdraw them, according to Matt Markowski, a principal of Markowski Investments in Tampa, Florida.
However, if you think your tax rate will go up in your golden years, it may make sense to do a Roth IRA conversion, in which you would pay taxes on the amount converted from your 401(k), but the not have to pay them on future distributions.
"It all depends on what you think your tax rate will be in the future," Markowski says.
5. Should I keep my retirement money with my ex-employer?
Instead of rolling over your 401(k) to an IRA, you may opt to keep your retirement money with your former employer. This may be the case if the account charges low fees or if it's a defined benefit plan that doesn't allow you to roll it over or cash it out, Hopkins says.
"In most cases, companies want you to take the money," Hopkins says. "They don't want to keep the money because it's an additional cost to them to manage it."
6. What happens to my retirement fund if I retire early?
If you plan to retire around age 55, you may want to retain your 401(k) plan or keep a portion of your retirement savings in a 401(k), to fill the gap until you can begin withdrawing from your IRA at 59 1/2 without being penalized by the IRS for an early withdrawal, according to Markowski.
"If you plan on retiring early, you need to figure out how much you need each year and multiply it by the number of years until you turn 59 1/2," Markowski says.
7. What is the financial impact if I get a divorce?
If you have a leftover 401(k) account from before you were married, you should consider the community-property ramifications, before rolling it over into an IRA, according to Pam Friedman, an Austin, Texas-based certified financial planner and certified divorce financial analyst.
"If you marry and then consolidate, you may have inadvertently co-mingled funds, converting separate property to community property, unless you go through the expensive process of trying to trace the source of funds during divorce," Friedman says.
Instead, you may want to roll over a 401(k) whose funds were allocated before your marriage to a new IRA account, so that the lines are clear as to which funds are community property and which are separate property, Friedman says.
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