SmartAsset and chof360 Finance LLC may earn commission or revenue through links in the content below.
As you progress through your career, you may accumulate multiple retirement accounts from different employers, including 401(k) plans, IRAs or other investment vehicles. As a result, you may end up wondering if you should consolidate your retirement accounts. Retirement account consolidation can simplify portfolio management, potentially reduce fees and provide a clearer financial picture. However, whether it makes sense ultimately depends on your individual circumstances and preferences.
A financial advisor can help you assess whether consolidating your retirement accounts aligns with your overall retirement strategy.
Deciding whether to consolidate your retirement accounts involves evaluating several factors, including ease of management, investment flexibility, fees and tax implications. Here's a breakdown of four factors.
One of the main reasons people consolidate retirement accounts is to reduce fees. Different retirement accounts charge varying administrative and management fees, which can eat into your returns over time.
If you have older 401(k) accounts with high fees, rolling them into a lower cost IRA may save you money. On the other hand, some employer-sponsored plans offer lower fees than IRAs, so compare costs before making a move.
Investment flexibility is another key consideration. Employer-sponsored 401(k) plans may have limited investment choices, while IRAs typically offer a broader range of funds, stocks and bonds. If your current retirement plans restrict your investment strategy, consolidating into an IRA could provide more options.
However, some employer-sponsored plans offer exclusive institutional funds with lower costs than individual IRAs do. Reviewing the available investment choices in each account will help determine whether consolidation makes sense.
The tax treatment of your retirement accounts is an essential factor in deciding whether to consolidate. If you transfer a traditional 401(k) into a traditional IRA, the move is typically tax-free. However, rolling a traditional 401(k) into a Roth IRA triggers a taxable event, requiring you to pay income taxes on the converted amount.
Additionally, some employer plans allow penalty-free withdrawals if you leave your job at age 55, whereas IRAs require you to wait until you are 59 ½. Consolidating could impact your ability to access funds early, so understanding the tax implications before making changes is crucial.
Story Continues
Once you reach age 73, the IRS requires you to take required minimum distributions (RMDs) from traditional retirement accounts. Keeping multiple accounts may complicate tracking and calculating RMDs, making consolidation beneficial for easier management.
However, some employer plans offer deferred RMDs if you're still working, so consolidating into an IRA may not always be advantageous.
If you decide that consolidating your retirement accounts is the right move, following a structured process will help you make a smooth transition and avoid tax penalties:
Assess your current accounts. Start by gathering details about each retirement account, including balances, investment options, fees and employer-sponsored benefits. Determine whether any plans have unique features worth keeping, such as low-cost funds or penalty-free early withdrawals.
Choose the right account for consolidation. Decide whether to consolidate into an IRA or an active employer-sponsored plan based on fees, investment choices and withdrawal flexibility. For instance, if you are seeking greater investment flexibility, then you may consider an IRA.
Initiate a direct rollover. Contact the financial institutions managing your retirement accounts and request a direct rollover to avoid tax penalties. A direct rollover allows funds to move from one account to another without being taxed as a distribution.
Confirm the transfer and allocate investments. Once the funds are transferred, allocate your investments based on your risk tolerance and retirement timeline. Consider rebalancing your portfolio to align with your long-term financial goals.
Update beneficiaries and account details. Make sure that your new consolidated account has the correct beneficiary designations to reflect your estate planning wishes. Also review automatic contributions and withdrawals to maintain your retirement savings plan.
Monitor your retirement plan regularly. Periodically review your investment performance and adjust as needed to stay on track with your retirement goals. Working with a financial advisor can help optimize your retirement savings approach.
When consolidating retirement accounts, there are several important factors to keep in mind. Here are four general things that can help you make informed decisions and avoid costly mistakes:
Understand IRA contribution limits. Traditional and Roth IRAs offer valuable tax advantages, but it's essential to know their contribution limits and eligibility requirements. Choosing the right IRA type-and knowing when to contribute-can significantly impact your retirement savings.
Consider creditor protection. Both employer-sponsored plans and IRAs provide safeguards against creditors, but the level of protection varies. Employer-sponsored plans, such as 401(k) plans, typically offer stronger federal protections under ERISA (Employee Retirement Income Security Act). IRAs also provide some creditor protection, but the extent depends on state laws. If safeguarding assets from potential creditors is a priority, it's worth reviewing how your state treats IRA assets before consolidating.
Evaluate employer stock before rolling over. If you hold employer stock in a 401(k) or another workplace retirement plan, carefully assess the best approach before rolling those assets into an IRA. In some cases, using a net unrealized appreciation (NUA) strategy may offer significant tax advantages. This approach allows you to transfer employer stock to a taxable brokerage account rather than an IRA, potentially reducing long-term tax liability.
Be aware of the IRA’s one-rollover-per-year rule. When rolling over funds from one IRA to another, it's important to follow the one-rollover-per-year rule to avoid unexpected tax consequences. This IRS rule limits individuals to one IRA-to-IRA rollover within a 12-month period, regardless of the number of IRAs they own. Direct trustee-to-trustee transfers between accounts do not count toward this limit, however, making them a preferable option for avoiding tax penalties.
Consolidating retirement accounts can make management easier, lower fees and increase investment options, but it may not be right for everyone. Rolling multiple accounts into one IRA or 401(k) has benefits, but factors like employer plan perks, taxes, and required withdrawals should be considered.
A financial advisor can help you evaluate your retirement plan options and how they fit into your overall financial goals. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
Mandatory distributions from a tax-deferred retirement account can complicate your post-retirement tax planning. Use SmartAsset's RMD calculator to see how much your required minimum distributions will be.
Photo credit: ©iStock.com/Maca and Naca, ©iStock.com/zamrznutitonovi, ©iStock.com/Leonid Sorokin
The post Should You Consolidate Your Retirement Accounts? appeared first on SmartReads by SmartAsset.
