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Put That Old 401(k) Back to Work

You've seen the commercials: Have a 401(k) left at an old job? Just call and you'll be back on track. That might be a good thing to do, but a little work before making a rollover will help you make the move that's right for you.

First steps
There are generally four options for dealing with an old 401(k) balance.

  • Leave it in the old plan
  • Roll the old 401(k) into the current employer's plan
  • Roll the 401(k) into an IRA account
  • Cash it out

In general, the last one is the worst one: Cashing out can have significant tax consequences and forces you start your retirement savings back at zero. But of the other choices, how do you decide which one's the best for you?

Pick an account
The first step is to make a list of current 401(k) and IRA accounts and what's in them. Now, lay out the options. What do you want your overall portfolio to look like when you're done?

If you like the investment choices in an old 401(k) and the plan doesn't require you to roll out of it, keeping it often makes sense. Similarly, if the choices in your current employer's 401(k) plan suit your needs, and the plan allows you to bring in assets from a former job, roll the old 401(k) into that plan.

A rollover to an IRA, however, will give you the most flexibility going forward. Investors who only want to hold a few mutual funds can roll the old 401(k) into single mutual fund IRA account(s). In contrast, a brokerage IRA account will offer the broadest range of investment options and can put the old 401(k) assets and current IRA assets all in a single account. Keep in mind a 401(k) does offer some features, like the ability to take a loan, that aren't available with an IRA.

How to invest
Planning the new portfolio depends partly on the amount. If the total is relatively small, one or two diversified mutual funds or broad market ETFs can give you more than enough diversification. The SPDR S&P 500 (NYSE: SPY  ) or Vanguard Total Stock Market (NYSE: VTI  ) make sense, and if you mix in the diversified bond ETF iShares Barclays Aggregate Bond Index (NYSE: AGG  ) , you've got a good investing start to a do-it-yourself target fund.

If you've got a sizeable stash, adding individual stocks or sector ETFs starts to make sense. For example, emerging markets stocks give you exposure to some of the fastest-growing economies in the world, and Vanguard Emerging Markets Stock (NYSE: VWO  ) gives you a host of good emerging market investments. If you're more conservative, however, the PowerShares Dynamic Food & Beverage ETF (NYSE: PBJ  ) invests in companies that are tailor-made for a defensive investors seeking dividend income. On the other hand, if you think the titans of tech and their ironclad balance sheets are the best place to put your money, the iShares Dow Jones US Technology ETF (NYSE: IYW  ) is a logical investment. A brokerage IRA gives you access to all of these ETFs and a whole lot more.

Part of the investment mix step should include a realistic assessment of your interest in stocks and willingness to spend time maintaining a portfolio. If you're interested and enjoy spending time on finances, individual stocks are great. If not, mutual funds or ETFs are the way to go. There's no reason a portfolio can't mix funds and stocks.

Picking a broker
Assuming the plan forward is a rollover to an IRA, you're ready to start shopping for a broker. Are the funds you want available? Are they part of the no-transaction-fee offerings? If you want to invest with options, ask about any restrictions with IRA accounts. Some brokers don't charge commissions on ETF trades. Commissions can vary between brokers depending on account size, number of trades, trade size, and share price.

A good starting point for brokerage ideas is TMF's Find a Broker page, but there are lots of choices out there. With a little research, you'll find the broker offering what you want at the best price.

By rolling old 401(k) plans into a brokerage IRA, the whole world of stocks, ETFs, mutual funds, CDs, bonds and even options can be your oyster.

Related Foolishness:

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool contributor Russ Krull does own any of the ETFs mentioned in this article. The Fool owns shares of Vanguard Emerging Markets Stock ETF. Try any of our Foolish newsletter services free for 30 days. The Fool has a disclosure policy.

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