The nature of work is no longer what it used to be. Gone are the days of working for just one employer for an entire career. Now, it’s more common to move between lots of jobs.
According to a recent study by the Bureau of Labor Statistics, the average person will have more than 12 jobs during the course of their career. That’s a lot of jobs – and potentially, a lot of 401(k) accounts.
That’s because instead of the pensions that many workers in previous generations had, the average worker today is likely to have self-funded retirement accounts like 401(k)s through each new employer.
This means that as employees move between jobs, many will be left with a hodgepodge of old 401(k)s and other retirement accounts.
Is it best to leave them as they are, or to consolidate 401(k) accounts? And if so, how do you consolidate them?
Read on to learn how to consolidate 401(k) accounts, along with the pros and cons of the most popular consolidation options.
What You Need to Know About 401(k) Plans
A 401(k) is a workplace-sponsored retirement plan. If you sign up for a 401(k), contributions are deducted from your paycheck to go into your 401(k) account. Often 401(k) plans are offered to employees as a workplace benefit, like vacation days and healthcare coverage.
Some companies offer a 401(k) match. This is where a company contributes money to an employee’s 401(k) to match the amount of money the employee has contributed, up to a certain amount. A company match program can make a 401(k) a lucrative way to save money for retirement.
In addition, 401(k) plans are considered an advantageous way to save retirement money because they have certain tax advantages. For instance, 401(k) accounts are referred to as “tax-deferred” because income taxes are deferred until later, when you take the money out in retirement.
The taxation of retirement accounts is an important consideration in long-term financial planning. Taxation also acts as a guide for knowing what retirement account types can be combined, and which types cannot be combined with other retirement account types.
Because all 401(k) accounts share the same tax status (tax-deferred), they can be combined. Traditional IRAs are also tax-deferred and can be combined with a 401(k) account. This process is called a rollover.
A Roth IRA is another popular retirement account type. A Roth IRA cannot be rolled over or combined with a 401(k) or a traditional IRA account, however, because it has a different tax status. With a Roth IRA, you pay the taxes upfront (meaning you make the contributions with after-tax dollars) and your qualified withdrawals are not taxed.
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Should I Combine My 401(k) Accounts?
You might be at the point during your career where you’ve got at least one 401(k) account from a previous job that you’re no longer contributing to. If you are wondering whether to consolidate your 401(k) accounts, here are a few of your options:
- Transfering the 401(k) account(s) into your active 401(k), meaning the one you have with your current employer).
- Rolling the 401(k) account(s) into a Traditional IRA at an institution of your choosing.
- Doing nothing, and leaving the account(s) as is.
Everyone’s financial situation is different, so evaluate the pros and cons of each option when trying to decide what is best for you. When weighing your options, here are some things you might consider:
Option 1: Rolling Over into Your Active 401(k)
Your first option with a 401(k) with a former employer is to transfer the money into your active 401(k) account with your current employer.
Pros:
- A single place for your tax-deferred money: By transferring old 401(k) accounts into an existing 401(k), you are consolidating those tax-deferred accounts in one place. You may find managing just one account an ideal scenario.
- Consolidating your investment strategy: Consolidation may make it easier to keep track of your money and manage a cohesive investment strategy. It can be challenging to manage a bunch of different retirement accounts.
Cons:
- Limited investing options: Sometimes 401(k) plans have limited investing options. If this is the case with your current active 401(k), consolidating your other 401(k)s into the plan may limit your investing choices overall. Look at the investment option information provided by your plan to help make an informed decision.
- Additional fees
Some 401(k) accounts have additional fees on both the accounts and investments themselves. Check to see if fees are assessed at a flat rate, or if they are assessed as a percentage of the amount invested. This may influence your decision to transfer your other 401(k)s into your active 401(k).
How to do it:
How to consolidate 401(k) accounts starts with contacting the institution that holds your old 401(k) and requesting a rollover to your active 401(k). The customer service representative should likely be able to help you on the phone or direct you to the paperwork online. It can be smart to clarify that this is a rollover to another tax-deferred account.
Ideally, the company is able to transfer the funds electronically to your active 401(k). If they are not able to do this, they may request an address to send a check. Get the address of the financial institution where your 401(k) is located and have it ready before making the call.
Option 2: Rolling into an IRA
Rolling old 401(k) accounts into a Traditional IRA of your choosing is a popular choice that allows you maximum control over the investments within the account.
Pros:
- You choose the institution: You get to choose where to open your individual retirement account. By selecting the institution, you can choose a place that fits your needs. You will have control over your investment choices and whether to use an institution that charges for certain services.This may be especially important if the institution that holds your current 401(k) charges account maintenance fees or only offers high-cost investment products.
- You’ll control it: You open a Traditional IRA on your own and without an employer—therefore, a Traditional IRA is yours. Some people may find it helpful to think of a Traditional IRA as a “home base” for their tax-deferred money. As you move through your career, you can roll old 401(k) accounts into a Traditional IRA that’s not going anywhere—it’s your home base.
- More investment options: As compared to some 401(K) plans, a Traditional IRA opened at an institution of your choosing may have more options for investing. Some 401(k) plans may require that participants choose from a pre-selected list of options. If you open a Traditional IRA at a brokerage firm or other financial institution, you’ll have the benefit of a broker’s wisdom and experience should you wish to use a broker. Asking the right questions is key to making sure a broker is the right fit for you.
Cons:
- You may still have multiple accounts to maintain: Even if you open a Traditional IRA, you may still want to contribute to your active 401(k). Therefore, you will need to maintain at least two retirement accounts. (And perhaps three, if you have a Roth IRA, which cannot be combined because it has a different tax status.) (Still, having two accounts—an active 401(k) and a Traditional IRA—might be better for you than having many multiple 401(k) accounts scattered around at different financial institutions.)
- It may complicate a “backdoor” Roth IRA: A backdoor Roth IRA is a way to contribute to a Roth IRA when your income is too high to contribute to one directly. Though you’ll want to check with a tax professional, it is generally understood that a backdoor Roth IRA might be complicated if your Traditional IRAs contain a mix of pre and post-tax money that you put in. If you want to pursue a backdoor Roth IRA, you may want to roll your old 401(k) assets into your current 401(k), or leave the account as it is. The greater the balance in your Traditional IRA, the greater the tax liability for the backdoor Roth IRA contributions since you can only contribute money that’s already been taxed to a Roth IRA.
How to do it:
If you do not already have one, you may want to open an IRA account at a financial institution of your choosing. This could be at a bank or other financial institution.
Once your Rollover IRA is active you can roll funds from your 401(k) into the Rollover IRA. The process is generally similar to that of rolling assets into an active 401(k) as noted above.
Option 3: Doing Nothing
Lastly, you may opt to leave your 401(k) accounts exactly as they are. Here are some pros and cons of this strategy.
Pros:
- You are happy with the financial institution and/or investments: If you like your current investment allocation and investment options and want to continue using them, you may choose to leave your 401(k) as it is.
Cons:
- Difficult to manage: It could be hard to manage a cohesive investing strategy across multiple accounts. This may be the case for someone that has multiple accounts at different institutions.
- Cannot add money to an old employer-sponsored 401(k): It is not possible to contribute new money to an old 401(k) account that was previously tied to an employer. New money must go into a current 401(k) or some other self-directed retirement account, such as a Solo 401(k), Roth IRA, or Traditional IRA. If you do not currently have access to an employer-sponsored 401(k), you may want to seek out another retirement account for which you can make contributions.
- Possible maintenance fees: Old 401(k) accounts may charge monthly or annual fees such as account maintenance fees. By consolidating, it may be possible to eliminate all or most of these fees. For example, a person could roll old 401(k) accounts that charge a maintenance fee into an account that has no such fee, whether that be their current 401(k) or a Traditional IRA.
- Limited investing options: Because a person does not get to choose the bank that holds their employer-sponsored 401(k), they don’t get to determine the plan’s investing options, either. Therefore, it’s up to you to decide whether the available investment options in your old 401(k) are sufficient.
The Takeaway
People may benefit from consolidating their 401(k) accounts into their current 401(k) or into a Traditional IRA, if for no other reason than to consolidate their money under one roof.
It can be hard to manage a bunch of different accounts at different institutions, and may only get harder as individuals progress through their careers and end up with even more 401(k) accounts.
In general, a Traditional IRA can provide more flexibility and investing options than a 401(k). It means that you’ll be managing two accounts, yes, but it might be worth it to keep a Traditional IRA as a home base to roll all old 401(k) accounts into over time.
When you open an IRA, you’ll want to find a bank or financial institution that meets your needs. Many investors prefer institutions where they will not be charged with unnecessary fees and have access to low-cost investing options.
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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8 ways to get the best credit score you can
Learning how to achieve and maintain a good credit score is a crucial part of your financial health. Not only can it be a badge that says your financial life is in good shape, it can also help you access credit and get approved for loans and insurance at more competitive rates. Being approved for lower interest rates and premiums can in turn save you tens of thousands of dollars over your lifetime.
A solid credit score can also have other perks, such as helping you get approved for products with better features, such as rewards credit cards.
While there’s no one size fits all solution on how to keep a good credit score, there are some best practices you can follow. Read on to learn more about this topic and actual tactics, including:
- What is a credit score?
- How can you maintain a good credit score?
- What are tips to keep your credit score high?
- How can new credit card users establish a credit score?
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A credit score is a three digit number ranging from 300 to 850 that is an indicator of your credit behavior. Your score is calculated based on your credit history from all three credit bureaus — Experian, Equifax, and TransUnion — and is based on how lenders may perceive your risk as a borrower.
What exactly does that mean? By reviewing your past use of credit, your score reveals if you are more or less likely to pay back your loans on time. If you are more likely to repay your debts in a timely manner, the less risky you are.
The higher your credit score, the more creditworthy you are in the eyes of lenders.
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Several factors can affect your credit score, such as your payment history, the number of loan or credit applications submitted, and the age of your accounts you hold. There are also different scoring models, such as FICO vs. VantageScore. Each weighs factors differently to arrive at a credit score.
Meaning, there may be some differences in your credit score.
Lenders may look at one credit score or all of them, plus different qualification criteria when deciding whether to approve you for a loan and at what interest rate.
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Though there are different credit scoring models, most use similar financial behaviors to calculate them.
They’re grouped in the following categories:
- Payment history: This factor is one of the most important factors in your credit score as it assesses whether you’re likely to pay your loan on time. Credit scoring models will look into current and past account activity, including any late or missed payments.
- Amounts owed or available credit: The percentage of the available balance you’re using is your credit utilization. The more you are using available credit in your revolving accounts (like your credit cards and lines of credit), the more it could appear you rely too much on credit. This can make you look like a risky person to whom to lend.
- Age of credit history: The longer your credit history, the more a lender can look into your credit behavior. It’s usually considered good to have a long credit history vs. a very short or recent one.
- Account types: Having a different mix of loans offers more insight into how you handle various accounts. Credit-scoring models may not, however, use this as a major factor when calculating your score.
- New or recent credit: The more recent applications you submit for new loans or credit accounts, the more risky you may appear to be. That’s because it may look like you need to rely on credit; that you are quickly trying to acquire different forms of access to funds.
(There are some exceptions, such as shopping around for mortgages within a short span of time.)
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Understanding the importance of a good credit score and what goes into it can help you protect the one you have. The following are eight suggestions on how to maintain a good credit score.
1. Pay Your Credit Card Bills on Time
Ensuring you’re on top of your bills (not just your credit cards) will help keep a positive payment history in your credit reports. This is the single biggest contributing factor to your credit score at 30% to 40%. Consider setting up automatic payments or regular reminders to ensure you’re paying on time.
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Your credit utilization is the percentage of the available limit you’re using on your revolving accounts like credit cards. Basically, you don’t want to spend close to or at your credit limit. A good rule of thumb to follow is to now use more than 30% of your overall credit limit.
So if you have one credit card with up to $10,000 as the limit, you want to keep your balance at $3,000 or lower.
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Even if you don’t use your older credit cards that often, keeping them open means you can maintain your long credit history. Consider charging a small or occasional amount, whether an espresso or gas station fuel-up, to ensure your account stays open. This can reassure prospective lenders that you have been managing credit well for years.
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Consider this as you try to keep a good credit score: Go slow. Since credit-scoring models look at the number of times you apply for new credit, only open one when you really need it. Stay strong in the face of offers to get free shipping or 10% off if you sign up for a card that many retailers promote.
Spreading out your applications is a good idea rather than regularly or heavily putting in a lot of card applications. By moving steadily and choosing a credit card and other types of funding carefully, you likely won’t raise red flags, such as that you need to rely heavily on credit.
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Mistakes can happen, and errors in your credit reports could negatively affect your score. You can get your credit reports for free at AnnualCreditReport.com from all three credit bureaus.
It’s wise to check your credit scores regularly, which won’t impact your score. If you see an error — whether it’s an account you don’t own or a bill marked unpaid that you know you took care of — dispute it as soon as possible.
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Making payments in full will help you maintain a positive payment history and lower your credit utilization. Both of these can maintain your creditworthiness and save you money on interest charges.
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Closing your old credit cards could shorten your credit history. It could also increase your credit utilization because it will lower your available credit limit. Even if you make the same amount in purchases, your credit utilization would go up when your credit score updates.
For example, if you currently have an overall credit limit of $28,000 and you have $7,000 in credit card balances, your credit utilization is 25%. If you close a credit card which had a $7,000 limit, you then lower your total available credit to $21,000 your credit utilization will go up to 33%.
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It can be hard to say no to an invitation to try a pricey new restaurant or not tap to buy when scrolling through social media. But when you let your spending get out of hand, you may use your credit cards too much. It can feel like free money in the moment — but you still have to pay it back. If you overextend yourself, you may find it hard to pay your balance on time and risk a late or missed payment.
Instead, spend only what you can afford and try to avoid lifestyle creep (having your spending rise with your pay increases or even beyond them). That can help provide some guardrails for using credit cards responsibly.
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Trying to establish a credit score can be a challenge since, ironically enough, you need credit to build credit.
If you are in this situation, there are several options to pursue, such as the following:
- Open a secured credit card: A secured credit card is one where you’ll put down a refundable cash deposit that will act as your credit line. You can use this to establish credit and apply for an unsecured credit card. Some issuers will upgrade you once you make consistent on-time payments for a predetermined amount of time.
- Apply for a credit builder loan: These types of loans are specifically geared towards helping you establish and build credit over time. Instead of getting the loan proceeds like a traditional loan, the funds are held in an escrow account until you pay back the loan in full.
- Become an authorized user: You can ask a loved one, like a parent or even a close friend, if they’re willing to add your name on their credit card account. Doing so means the credit account will go in your credit history. Of course, that doesn’t give you access to use their account without restraint. The guardrails can be established between you and the original card holder.
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Maintaining a good credit score (and keeping that score high over time) comes with perks such as increasing the likelihood of getting approved for loans at more favorable terms. You might qualify for lower interest rates, saving you a considerable amount of money over time.
Using a credit card wisely is one of the ways you can build and maintain your credit score. But that’s not all there is to opening a credit: You also likely want one with great perks.
This article originally appeared on SoFi.comand was syndicated by MediaFeed.org.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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