Rollover your 401(k) or 403(b) ... Or not?

Will It Be Helpful?

If you have a 401(k) or 403(b) account from a former employer, should you move it somewhere else? After reviewing the factors outlined here, you will be able to make an informed decision. Should you decide to move the account, you would be wise to consider two options:

• Transfer to an IRA account at a good firm. See our review of the best firms.
• Transfer to the retirement plan of your current employer. If the plan has low fees or it meets other criteria explained below, this may be worth considering.

Probably the most important question to ask yourself about transferring your 401(k) or 403(b) is whether it will help you manage your money. Are you paying attention to your retirement accounts? How much time are you willing to invest to keep track of them? Would it be helpful to consolidate in fewer accounts? Thinking about these questions, you may decide it would be easiest, and smartest, to have the minimum number of accounts:

• A 401(k) or 403(b) account with your current employer.
• An IRA account that aggregates all the 401(k) or 403(b) funds from previous employers. It might also include some direct contributions that you make.

But before you rush off to do that rollover, consider a few more questions.

What Fees Are You Paying?

How do the fees of your old 401(k) or 403(b) compare to the fees at the firm where you might move your investments? Finding the fees of a 401(k) or 403(b) plan can be difficult. There are step-by-step instructions here. If it turns out that an account from a former employer meets our benchmark level of 0.4% ($4 per $1000 per year), you may want to consider keeping your investments there. If not, read on.

Are There Exit Costs?

You'll need to find out out whether you would face any termination fees. The main types are:

• Surrender charges on an annuity. If you have an annuity in your 401(k) or 403(b) plan, it may charge an extra fee for terminating the annuity contract. Read the prospectus, or talk to your vendor, or try the 403bCompare site for your vendor's fees. Normally, the only way to eliminate these charges is to wait longer.
  
• Back-end loads on a mutual fund. This type of fee is charged when you sell a fund. The fund is normally listed as "Class B" if it carries a back-end load. Verify the fee with your vendor's representative, because these fees are sometimes waived. If a back-end load applies, you cannot escape the payment. You will have to pay now, during a rollover, or later, when you retire. It may be less now than in the future, so a back-end load is actually a reason to rollover, not a deterrent.
• Frequent trading fees. If you purchased a fund within the previous 30 to 90 days, your vendor may charge a fee (maybe 2%) when you sell the fund. Check the fund prospectus or ask your vendor's representative. If fees apply, you will have to wait a few weeks until they are no longer charged.

Will You Work Past Age 70?

In a traditional IRA account, you must begin taking withdrawals in the year you reach 70.5 years of age. However, in some 403(b) and 401(k) plans, you may not have to take withdrawals from your current employer's vendor until you stop working for that employer. For past employers, as for a traditional IRA, you have to take withdrawals in the year when your age hits 70.5 years. Then there's a Roth IRA, where you never face mandatory withdrawals until you die (and then your heirs have to spend it). And did you know about the special case for pre-1987 contributions to a 403(b), which don't have to be withdrawn until you are 75? Confused? Consult the IRS for details ... or focus on the following key points concerning a rollover:

• If you plan to work past age 70 and your employer won't require withdrawals, you may want to consider transferring 401(k) or 403(b) accounts from previous employers into the one for your current employer.
• If you will be working past age 70 and your current tax rate is low, you may want to consider transferring some or all of your old 401(k) or 403(b) accounts to a Roth IRA. Be careful. You will have to pay some taxes on the amount transferred, so check with your tax adviser before doing this.

Ready to Start a Rollover?

Before you start, please note! Do a trustee-to-trustee transfer, not a rollover. In a rollover, you liquidate the old account, get a check, deposit it in your bank account, then send a check to your new vendor. The IRS lets you do this tax-free only once every 12 months. Do it twice in 12 months, and you'll owe taxes. Also, if the process takes too long, you may owe taxes. In a trustee-to-trustee transfer, your old vendor sends a check to your new vendor. There's no IRS limit on annual frequency and no tax liability.

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Able to Pay LLC is not a tax adviser. You should consult the IRS or your tax adviser about tax consequences. None of the information here should be taken as advice or solicitation to buy a particular fund, security, product, annuity, or type of insurance. You are responsible for your investment decisions, and should read the prospectus and disclosures for a security before investing. Investments have risks; you may lose money. Please read our full disclosures and our Fiduciary Oath.