WASHINGTON, D.C. (11/30/09)--If you have money from a former employer in a 401(k), 403(b), or other tax-qualified plan, consider rolling it over to a 401(k) with your current employer. Most employers allow rollovers (Kiplinger’s
Nov. 19). Once you’ve determined it’s allowed, you can save yourself a lot of trouble--and money--by asking your former employer to send the cash directly to the new 401(k) plan. It’s a seamless process. Directly rolling over the money instead of withdrawing it and then making the move allows you to transfer your money without being subject to state or federal withholding taxes or withdrawal penalties. There are advantages and disadvantages to rolling your money into your new employer’s 401(k). Advantages:
* Ease in diversification. If your 401(k) balance is low (for example, $5,000), it’s easier to diversify the money than if you try to open a new investment account. In the new 401(k), you can spread the money out regardless of how much you have to invest. * Tax break. The money you invest continues to grow tax-deferred until the moment you start to receive payouts.
* Loss of flexibility. You’re bound to whatever investment choices your employer offers. You can’t access your funds again unless you want to take a loan (if allowed) or you terminate employment. * The possibility of high fees. Some 401(k) plans have relatively high fees, especially if your new employer is a small business. You may pay 1% or more for each investment, compared with what you might pay for a comparable investment outside of the plan for half that.
If you decide to roll over your old 401(k) to your new employer’s plan, make sure you’re showing up as a terminated employee at the old company; it can’t release the funds until you’re terminated. While you’re checking, ask for the required paperwork. Finally, after you’ve checked with your old provider, call the new one to find out what it requires to accept the rollover. As you fill in the forms, don’t be reluctant to call either provider with questions about how to fill in the information. You could save yourself setbacks and delays for missing something as simple as one checkmark in a box (Generation X Finance