What to Do With Old 401(k) Accounts

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Who: Erin Scottberg, 27

Where: Brooklyn, N.Y.

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Question: What should I do with my retirement accounts from previous employers?

These days nobody sails through life with just one employer, and Erin is no exception. When she left a post last November as a Web editor at AOL to join an Internet start-up, she bid adieu to a solid company and its established retirement plan. Her new employer, the online dating site HowAboutWe.com, doesn't offer retirement benefits, so Erin has a decision to make about her future: how to handle, or not handle, her past 401(k) investments.

Erin has two 401(k)s from previous jobs, each worth less than $3,000. She's also taken the precaution to build a savings account that could last six months if her job or her employer doesn't work out. She is free of student-loan debt, so she can concentrate on building retirement savings. Her questions are where and how. "I would like something that I can leave alone and let grow," Erin says. "But I want to understand what's happening."

This situation isn't unique to Internet entrepreneurs. When you take a new job, you usually leave behind a company 401(k) plan (or the public-employee equivalent). You'll surely wonder, if only for the sake of simplicity, whether to combine that money with other retirement savings. "It's a good habit and good discipline to roll all of the accounts into an IRA," says Janet Stanzak, an adviser with Financial Empowerment, in Bloomington, Minn.

New Wrinkles

But simplicity isn't always best. For instance, you might want to keep an existing 401(k) if the plan includes company stock you prefer to hang on to, or if the plan offers privileged access to another distinctive investment. An example is a stable-value account, a fixed-value fund that may yield as much as 4% now and will pay more as interest rates climb. Stable-value accounts rarely appear outside retirement plans, so if yours has one, you might want to keep it.

In Erin's case, however, it's sensible for her to close her previous accounts and consolidate the money into an IRA, either a traditional or a Roth account. With a Roth, she'd have to pay immediate taxes on the conversion, but she'd benefit from tax-free income in retirement. A Roth can also double as a mid-range savings account and source of tax-free cash for a down payment on a first home.

If Erin doesn't want to pay taxes right away on a Roth, she could roll her 401(k) assets into a traditional IRA. Or, she could divide her money between the two. A suitable investment would be one of the Vanguard mutual funds, which require a $3,000 minimum, and Total Stock Market Index (VTSMX) would be ideal. To compensate for the fact that her new job has no retirement plan, she could continue adding to her IRA from each paycheck. For 2011, she may contribute up to $5,000 to an IRA.

Meanwhile, Erin works for a fledgling firm in an uncertain field, so keeping some money in the savings account is a necessity. "If her job is at risk, she needs to have cash," says Erin Baehr, owner of Baehr Family Financial, in Stroudsburg, Pa. Still, a new company has appeal, especially for a 27-year-old. "At her age and stage of life, I think a start-up is a fabulous opportunity," says Stanzak.