By David L. Cumming
As we move through our career, we often accumulate a number of different retirement accounts: A traditional IRA here, a rollover IRA there, and two or three scattered 401(k) accounts left in the plans of former employers.
As the accounts add up, it can become difficult to get a clear picture of your overall retirement preparedness.
Consolidating your retirement accounts into one central account can help you make sure your retirement assets are invested appropriately for your overall goals, better track the performance of your holdings and, in some cases, discover more investment choices and potentially incur lower fees.
However, consolidating retirement accounts into one account may not be right for everyone. Before taking any action, you should carefully compare your potential options in order to reach an informed decision about what makes the most sense for you.
Streamlining the account structure of your retirement savings may offer many potential benefits, including:
A comprehensive investment strategy
Your investment objectives and risk tolerance can change over time. This may make it difficult to maintain a retirement investment strategy that accurately reflects your current goals, timing and risk tolerance when your retirement assets are spread over multiple accounts. Consolidating your accounts may help allow you to make sure your investment choices match your current goals and objectives.
Potentially greater investment flexibility
Employer-sponsored retirement programs such as 401(k) plans and some IRAs may offer a limited number of investment choices. Some IRAs may offer more investment options or expanded diversification than a workplace plan. Whether a particular retirement account’s options are attractive will depend, in part, on how satisfied you are with the options offered under your existing retirement accounts.
Simplified tracking
It’s generally easier to monitor your progress and investment results when all your retirement assets are in one place. By consolidating your accounts, you will receive one statement instead of several.
Monitoring costs
Reducing the number of accounts may impact account fees and other investment charges. Generally speaking, both employer-sponsored qualified plans and IRAs have plan or account fees and investment-related expenses. However, in some cases, employer-sponsored qualified plans may offer lower cost institutional funds and may pay for some or all of a plan’s administrative expenses. Generally, fees associated with an IRA will likely be higher than those associated with an employer plan.
Penalty tax-free withdrawals
Generally, IRA owners can take distributions penalty tax-free once they reach age 59½. Qualified plan participants between the ages of 55 and 59½, once separated from service, may be able to take penalty tax-free withdrawals from the qualified plan.
Helping simplify your required minimum distribution (RMD) obligation. Upon reaching age 70½, owners of a traditional IRA must begin taking required minimum distributions (RMDs) or face stiff IRS excise tax penalties. Having fewer retirement accounts to manage can mean having fewer RMD requirements to follow.
There are some situations where you may not want to consolidate. For example, while many qualified plans allow for loans, you cannot take a loan from an IRA. Thus, once you roll over a qualified plan into an IRA, the ability to take a loan is no longer available. However, once you leave the company sponsoring the employer plan, you may not be able to take a loan out anyway, since few qualified plans allow loans to be taken out by former employees.
Typically, as a retirement plan participant who may be receiving an eligible rollover distribution from the plan, you have the following four options (and you may be able to engage in a combination of these options depending on your employment status, age and the availability of the particular option):
1. Cash out the benefits and take a lump sum distribution from the current plan subject to mandatory 20 percent federal income tax withholding, as well as income taxes and the 10 percent early withdrawal penalty tax, or continue tax deferred growth potential by doing one of the following:
2. Leave the assets in your former employer’s plan (if permitted),
3. Roll over the retirement assets into your new employer’s qualified plan, if one is available and rollovers are permitted, or
4. Roll over the retirement assets into a traditional IRA.
Each option offers advantages and disadvantages, depending on your particular facts and circumstances (including your financial needs and your particular goals and objectives). Some of the factors you should consider when making a rollover decision include (among other things) the differences in: investment options, fees and expenses, services, penalty tax-free withdrawals, creditor protection in bankruptcy and from legal judgments, RMDs, the tax treatment of employer stock if you hold such in your current plan, and borrowing privileges.