Should I Combine My 401(k)s?

Owners of multiple 401(k) plans can combine them through a rollover.

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Many people have one or more "old" 401(k)s from jobs they've left. Often these accounts linger, creating paperwork and confusion for their owners. But 401(k) plan owners have several options if they want more control of their retirement fund. In some cases, combining one 401(k) plan into another, called a "rollover," is an option. The self-employed and others might only be able to roll over their 401(k)s into Individual Retirement Accounts, or IRAs. In most cases, there is no penalty for keeping an old 401(k).

When You Can Rollover a 401(k)

In order to combine separate 401(k) accounts, the investor must currently be enrolled in one, either through her employer or by holding a self-employed 401(k). Because 401(k)s are workplace plans, you can't make new contributions, including rollovers, to an old 401(k). In many cases, you can roll over a 401(k) from your past job into the 401(k) offered by your current employer, though not all plans allow this. Many financial institutions let individual professionals open self-employed 401(k) plans that also could accept 401(k) rollovers.

Holding Old 401(k)s

Most employers will keep a former employee's 401(k) account open if it meets a minimum balance, in which case, it will continue to grow or shrink depending upon performance. While there may not be penalties for keeping one or more accounts active, some plans charge account-maintenance fees to former employees. There are some advantages to combining 401(k) plans or considering other rollover options.

Advantages of a 401(k) Rollover

The Wall Street Journal suggests that 401(k) owners consider the costs that plans charge, including account-maintenance fees that some employers charge ex-workers. Some 401(k) plans let owners take loans from the account, sometimes including the funds that were added through a rollover -- an option that isn't available if you roll over into an IRA instead. Also, 401(k) plans may offer more ways to make emergency withdrawals from your account before retirement age. Another advantage to 401(k) rollovers is the control gained by consolidating funds into one account, along with a reduction in paperwork.

IRA Rollovers for 401(k) Plans

Some 401(k) account holders may not have an active plan. Combining 401(k) accounts into one isn't an option since those accounts won't take new contributions. However, any 401(k) owner can rollover their accounts into an IRA, which offers some advantages to a 401(k). If you roll over into a 401(k), you are limited to the investments that your workplace plan offers -- including fees. If you choose to roll over into an IRA instead, you have control over the company with which you invest, the individual investments themselves and the costs and fees you will pay.

IRA Advantages and Options

There is no penalty to rollover a 401(k) into an IRA, which generally offers similar tax advantages to a 401(k) plan, but also gives account holders a wider selection of investment options, including stocks, bonds and mutual funds. IRAs aren't tied to your employment and can be maintained until retirement. Another retirement investment option is the Roth IRA; these require 401(k) owners to pay full taxes on the amount rolled over, but withdrawals at retirement are tax-free.