If you're like most people, you'll switch jobs several times before you retire -- 10 to 12 times, on average. And if you're like a lot of those people, you'll leave a trail of retirement-plan balances in your wake. Consolidating all of those balances into a rollover IRA is simple to do, and it can make your portfolio easier to manage while giving you many more options and preserving all of the tax-deferred benefits of your 401(k).
Miss you
Leaving money in a former employer's 401(k) is great -- for your old employer and its 401(k) plan provider, who will be happy to have the assets (and the opportunity to charge fees on those assets) indefinitely. And if you have most of your retirement savings in a single plan, and that plan happens to have a self-directed brokerage feature with low fees and relatively few restrictions, then it might make sense to leave your money in your old plan.
But most plans don't have such a feature, and given that the current trend among 401(k) plan sponsors is to reduce the number of options in plans in an effort to make things simpler for less-informed plan participants, it's not a sure thing that the plans that have a brokerage feature will continue to have one indefinitely.
Gimme shelter
Here at The Motley Fool, we're in favor of having you take as much control of your investments as you can. And to take control, you need flexibility to choose from as many stocks and mutual funds as possible. A rollover IRA allows you to do nearly anything you'd do with a normal brokerage account (aside from trades that require margin, such as short sales), and you get to do it tax-deferred, with no taxes to worry about until it's time to withdraw -- at which point your withdrawals are taxed as ordinary income.
So, instead of having a tiny selection of lousy mutual funds, you can choose just about any stocks or funds you want:
- You can go to Motley Fool CAPS to find five-star favorites like Chesapeake Energy (NYSE:CHK) and UnitedHealth Group (NYSE:UNH).
- If you like stocks with a long history of paying dividends to shareholders, you can go with companies like Johnson & Johnson (NYSE:JNJ) and Coca-Cola (NYSE:KO).
- On the other hand, if you prefer to shoot for the moon with your investing, go with growth winners like Apple (NASDAQ:AAPL) or Intuitive Surgical (NASDAQ:ISRG).
- If you prefer mutual funds or ETFs, you could have access to thousands -- including whole families of funds from leading low-cost providers such as Vanguard and BlackRock (NYSE:BLK).
If you have several old 401(k) balances floating around, there's another, more subtle benefit to a rollover IRA: Having all of those balances in one place makes it much simpler to work with them as a single portfolio. This simplicity means you're far more likely to implement a cohesive portfolio strategy, stay on top of it, and make changes as required -- all of which is much better than leaving your balance in some growth fund you chose years ago at the peak of the dot-com boom, which may or may not be performing well in today's very different market.
Satisfaction
Setting up a rollover IRA can be a pleasantly simple process, involving just a few minutes on the phone and a couple of forms to fill out. Nearly all discount brokers offer rollover IRAs, though fees and service levels differ (compare them in the Fool's IRA Center), and it's rarely a complicated process. A few things to watch out for:
- Make sure your old plan provider knows that you're moving your balance to an IRA, not withdrawing it -- ask for a "direct transfer" (or a "trustee-to-trustee" transfer) to your new IRA's provider. (The alternative is that you'll get a check with some money withheld, and you'll have a big potential tax headache.)
- If you have an existing relationship with a discount broker, it's simplest to have that broker set up your rollover IRA. But take a few minutes to compare costs and features among leading providers -- your choice to use your existing provider should be an informed one.
- If you're holding company stock in an old 401(k) plan, you may be able to save a lot of money in taxes by employing a net unrealized appreciation strategy. Stop everything and read this before initiating a rollover from that plan.
- Note that a rollover contribution doesn't count toward annual IRA contribution limits -- you can (and should!) still make your regular contribution.
One last thing: While enjoying the investment flexibility of your new rollover IRA, don't forget to keep investing in your current employer's 401(k) -- at least enough to collect the full amount of your current employer's matching contributions. Your retired self will thank you.
