The Smart 401(k) Rollover Option That Almost Everyone Forgets

Dan Caplinger for DailyFinance writes: Taking your retirement-plan money when you switch jobs and going on a spending spree would be a costly mistake, resulting in higher taxes, penalties, and lost investment opportunities. But even if you know enough not to treat your retirement account as a windfall, it's hard to get good advice on what to do with it instead.

Back in March, the Government Accountability Office took a close look at how workers handle 401(k) retirement plans when switching jobs. What the GAO's study found was that while the current process has a bias toward pushing workers toward rolling that retirement savings into IRAs, people often overlook another option: moving their retirement assets to your new employer's 401(k) plan.

Let's take a closer look at the options you have and which one makes the most sense in your situation.

Three Choices

When you switch jobs, you'll typically have three options of what to do with the money in your employer-sponsored retirement savings account.

• You can roll it over into an individual IRA at the financial institution of your choice.
• If your new employer offers a 401(k) plan, then you can transfer the assets into your new employer's plan.
• And lastly, if you have enough money to satisfy your existing plan's minimum account balance for former employees -- usually $5,000 -- you can keep your money in your old employer's 401(k).

The GAO found several pieces of evidence pointing to the tendency to push former employees toward IRAs. IRA providers tend to be more aggressive in seeking rollover business, as nine of the 10 providers the GAO reviewed advertised the fact that they offer assistance to workers wanting to roll over old retirement assets. New-account bonus payments of as much as $2,500 helped provide even greater incentives to choose an IRA.

By contrast, the number of people using plan-to-plan rollovers is much smaller, with the GAO pointing to one plan sponsor that reported about 10 to 15 percent of participants moving their retirement savings to new-employer 401(k)s.

With the need to coordinate paperwork for both sets of plan administrators, workers found it far more difficult to get through the obstacles to getting their old retirement money into their 401(k) account at their new employer.

When a 401(k)-to-401(k) Transfer Makes Sense

Cost is a key component of choosing a retirement-savings option, and some 401(k) plans charge higher fees than you'd get by selecting a low-cost IRA investment. But in some cases, sticking with a low-cost 401(k) makes more sense than picking an IRA.