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How To Consolidate Your 401(k)s

By Paul Menchaca

NEW YORK ( MainStreet) --For professionals in their 30s, a decade-plus spent in the workforce not only means that they've held a number of different jobs at different companies but also that they've held multiple 401(k)s spread across their former employers. But all too often, people have not taken the steps to consolidate these stray pension plan accounts.

"It's a significant problem," says Kile Lewis, co-CEO and founder of oXYgen Financial, a full-service family office in Alpharetta, Ga. for clients in their 20s and 30s -- or the so-called Generations X and Y. "One of the biggest issues for this demographic is they have four or five small accounts, and so it doesn't seem like a lot of money to them."

In fact, Lewis says that he recently met with a young married couple who each had multiple old 401(k)s, with roughly $3,000, $7,000, $8,000 and $9,000 in them respectively. Rather than figuring out a way to consolidate those accounts, the couple instead decided to cash them out.

"They said that they didn't think it was a lot of money," Lewis says. "I said, 'That's $30,000, buddy.'"

Steven B. Goldstein, vice president and private CFO at oXYgen, says the chance to have immediate money on hand can unfortunately be too tempting for some people in their 30s to pass up.

"For people in this age group there are other cash-flow needs -- maybe they recently bought a home or just had kids and they are cash-flow strapped," Goldstein says. "They see this as a source of money if they cash [the 401(k)] out."

How to Play Your Options

The best strategy for consolidating these old 401(k)s will not necessarily be the same for everyone, according to Sarah Walsh, vice president of retirement solutions at Fidelity Investments. Although the most common piece of advice one may hear from friends and family is to rollover your old 401(k) accounts into an IRA, this might not always be the right option.

Walsh gives four different approaches people can take with their old accounts: leave them in place, roll them over into a current company's 401(k), roll them into an IRA or take a distribution in cash. The last option is strongly discouraged by Fidelity, Walsh notes, because of the tax hit and potential withdrawal penalties.
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