It is a rare for people in this day and age to stay with the same employer throughout their career. Therefore, it is likely that over the course of your career, you will contribute to multiple retirement plans. However, having multiple retirement accounts across former employers can be confusing and hard to monitor. Furthermore, you may miss opportunities of compounded growth on collective retirement assets if they are held in multiple accounts, as well as the benefit of ensuring a consistent strategy. The solution for this is to consolidate these multiple accounts into one Individual Retirement Account (IRA) that can be easily tracked, monitored and managed. Specifically, this should be a Traditional IRA because of the pre-tax contributions that may have been contributed to your 401(k).
To avoid any tax consequences, we recommend establishing a trustee-to-trustee transfer, also known as a direct rollover. In this process, you first establish an IRA and then give instruction to your former employer’s retirement plan to directly deposit assets into this established account. This is the optimal way so that all funds are transferred directly. A mistake individuals often make is to request the funds be issued to them rather than the account, whereby their former employer is required to withhold 20% of the balance. Put simply, this delays the process of effectively transferring all the assets. Also, if you fail to deposit these funds into an IRA within 60 days, it becomes a taxable distribution that is subject to ordinary income tax and potentially a 10% penalty. For this reason, we almost always recommend a direct rollover to an established Traditional IRA.
The benefits of rolling a 401(k) to a Traditional IRA can be tremendous. The first benefit is that you are no longer limited in your investment selection and may be able to pick the optimal allocation for your investment objectives and goals. The other benefit is you can continue to contribute to this account through annual contributions while you are employed or you may rollover other 401(k)’s into this account. As mentioned above, with all your retirement accounts rolled into one account, you not only can manage your allocation more effectively, you can also amplify the benefits of dividends and interest earned via compounding growth.
It’s imperative that you take the time to review all of your retirement accounts and ensure they are managed as efficiently as possible. Our advisors at Geier Asset Management can help you with this process and enable you to do what is necessary to maximize the potential of your accounts.