Doesn't it make more since to roll 401k/403b over to new employer for compounding interest reasons? (funds, vehicles)

[timetofly733]

I'm generally an intelligent person, but for some reason I can't seem to rationalize this - wouldn't it make more sense to always roll your 401k/403b over to your new employer to keep compounding interest on a bigger balance? If you start a new plan with new employer, the bigger amount at old employer is doing good with compounding, but the new amounts you/your employer are contributing to the new plan are starting out with low numbers until they build up. What am I missing?

[Petunia 100]

No, because the entire balance compounds exactly the same irrespective of how many accounts it is in (assuming investment vehicles and costs are the same). The distributive property of multiplication says so. Algebra says so.

What does make sense though is keeping your money together for simplicity. Or rolling to an IRA so that you can control both investment choices and costs.

[mathjak107]

In short no , compounding is compounding on total dollars not how you divide it up .

[gunslinger256]

there are other reasons to want to consolidate your 401k money

-ease of management
-lower expense ratio
-the 55+ rule

[k374]

i'm not quite sure what you are getting at. Your old 401k can go into a Rollover IRA which is more beneficial usually since those are not subject to administrative fees which can be onerous depending on plan. Additionally with a Rollover IRA you have the entire gamut of funds to choose from rather than being limited to the 401k plan choices.

I recently "rolled in" my Rollover IRA into my 401k since I needed to execute a backdoor Roth which requires this to be done. My 401k also has a plan fee of only .15% annually so it's very low.

Compounding has no relationship to account type... the math works out exactly the same with the only variations being fees and choices of funds as mentioned above.

[rjm1cc]

No.
You would move your 401k if your could move it to one that is performing better - investment selection and costs.
Consider rolling to an IRA.

[mathjak107]

Originally Posted by timetofly733

I'm generally an intelligent person, but for some reason I can't seem to rationalize this - wouldn't it make more sense to always roll your 401k/403b over to your new employer to keep compounding interest on a bigger balance? If you start a new plan with new employer, the bigger amount at old employer is doing good with compounding, but the new amounts you/your employer are contributing to the new plan are starting out with low numbers until they build up. What am I missing?

3 accounts with 50k in each going up hypothetically 10% is no different then one 150k account going up 10% ...

the only time it can matter is if their are different class funds and you get lower expenses by having more money in one as opposed to less in 3 different ones .

but that has nothing to do with compounding as per your question .

[turf3]

Everyone's situation is their own, but generally a 401k has strictly limited investment choices (I think ours has around 10 different funds) whereas if you roll it over into a rollover IRA, you can invest in thousands of different instruments. I have had various ETFs, CDs, TIPS, and so on, in my rollover IRA. My 401k only offers managed funds that are sold by the 401 administrator, and as noted only about a dozen of those.

[timetofly733]

Thanks for the info so I can get my head wrapped around it. Mathematically and logically, I knew the answer but I guess I just needed to hear others say it too! Will make the decision based on investment options and costs - thanks!

[Moonwalkr]

If you do backdoor Roth just be aware of pro rata rule if you do rollover your 401k to an IRA.