Figuring out your retirement plan can be a challenge — even more so when you’re dealing with multiple retirement accounts.
Juggling several different types of investment accounts, such as 401(k)s, traditional IRAs, and Roth IRAs, can make it difficult to know exactly where your retirement money is — and when you can (or must) access it. After all, each of these different retirement accounts has its own set of rules around when and how much you can contribute, how to take qualified distributions, and more.
By simplifying and streamlining your investment strategy, you’ll make financial planning a whole lot easier… and you’ll reduce your risk of costly errors like overcontributing to a certain account or overpaying maintenance fees. One way of approaching this project? Consolidating your 401(k) and IRA accounts to put all of your retirement savings in one place.
In this blog post, we will guide you through the process of consolidating retirement accounts using a rollover IRA — and help you understand the benefits of doing so. So let’s get started!
Consolidating your retirement accounts can make your life easier in a whole lot of ways—and it takes only a few steps to do so. You’ll likely pay fewer fees, have an easier time managing your account, and have a better handle on the most effective investment strategies available to you.
Plus, it’ll make things easier for your tax advisor and for your beneficiaries. Let’s explore some of these benefits in more detail.
By consolidating your retirement accounts, you’ll reduce the number of accounts you have to track, which makes it a lot easier to monitor your money. Investment decisions like asset allocation and rebalancing are easier to focus on when it’s only one account you need to make those decisions for.
When you use an IRA rollover to get everything in one place, you’ll have more control over your investments, which translates to a better chance of staying on track to meet your retirement goals.
Although investment accounts help you make money, they cost money, too — and consolidating your retirement accounts can help reduce those costs. Account fees, investment management fees, and underlying fund expense ratios can add up over time when you’re dealing with multiple brokerage accounts.
So when you get everything in one place, you can stash those savings right back into your pocket.
A great investment strategy — or any financial planning venture, for that matter — starts with a clear bird’s eye view of your total financial situation. Obviously, it’s harder to get started if you’re dealing with multiple retirement accounts.
After consolidating, you (and your financial advisor, if you have one) will have a comprehensive picture of your overall investment management strategy, including things like asset allocation (should you buy specific stocks and bonds or focus on ETFs and mutual funds?), risk tolerance (which will help inform your answer to that question), and investment goals (how soon you’d like to retire, how much you’ll need to live comfortably, etc).
Retirement accounts come in lots of different shapes and sizes, and you may have accumulated several different types over your working life. What’s more, each of these account types has different tax treatments, investment options, and rules. It’s essential to understand these differences when deciding to consolidate accounts — so let’s take a closer look at each to get on the right track.
Although they’re not the only type of employer-sponsored retirement account, 401(k)s are one of the most common — so if you’ve worked for multiple companies, chances are you have more than one floating around.
After you find them all (which we can help with!), consolidating your 401(k) accounts from former employers can — you guessed it — simplify your account management, reduce your overall fees, and improve your understanding of the investment strategies available to you.
One easy way to do this? You can roll over a 401(k) account from a former employer into an IRA, which gives you the most control over your asset alloction and investment choices. It’s also possible, in certain cases, to roll an old 401(k) over into your current employer’s plan.
Traditional IRAs, or Individual Retirement Accounts, are tax-deferred retirement accounts that are not employer-sponsored. That is, you can open one for yourself as a retirement savings account, even if you don’t work a traditional W-2 job.
If you have multiple traditional IRAs, consolidating them will make it easier and less expensive to manage them, not to mention helping you avoid errors like overcontributing. The IRS places a contribution limit on IRAs that’s substantially lower than the one on 401(k)s; for 2023, the limit is $6,500 or $7,500 if you’re age 50 or older, and that total applies across all the IRA accounts you own, both Roth and traditional.
You can roll multiple traditional IRAs over into a single IRA account — or, possibly into a new employer’s 401(k) plan. However, IRAs tend to offer greater flexibility and control to the investor than 401(k)s do when it comes to investment strategy decisions like asset allocation.
Roth IRAs are another type of Individual Retirement Account — but in this case, you pay taxes on contributions before they’re made. That means you’ll be able to withdraw funds tax-free come retirement. (Because this is such an attractive and valuable option, the IRS places income limits on direct Roth IRA contributions to govern who is eligible to benefit from one.)
As in the other cases we’ve looked at, consolidating Roth IRAs offers benefits such as simplified management, lower fees, and improved investment strategies. You can roll over multiple Roth IRAs into a single Roth IRA account or potentially into a new employer’s Roth 401(k) plan. Just keep in mind that the destination account must also be a Roth account; you can’t combine traditional and Roth funds since their tax treatments are different.
As we’ve discovered, there are plenty of worthwhile benefits to consolidating multiple retirement accounts — but it does take a few steps to make it happen.
Fortunately, you can simplify what would be a complex process, and avoid any tax-time surprises by doing just a little bit of research ahead of time — which you’re doing right now!
Here’s a quick step-by-step guide on how to consolidate your 401(k) and IRA accounts.
Now that we’ve gone over a few of the different types of retirement accounts available, you can consider factors such as tax implications, investment options, and eligibility requirements when choosing the type of account for consolidating your retirement assets.
For example, if you already have a Roth 401(k) from an old employer, you’ll need to find a matching account type, like a Roth IRA or an employer-sponsored Roth account, to roll those funds over into.
Different types of accounts work best for different retirement needs. Although a qualified tax advisor is the best person to ask for specific advice, one common rule of thumb is this one: if you plan for your tax bracket to be higher at retirement than it is now, a Roth account makes more sense. If you predict your tax bracket will be lower at retirement than it is now, a pre-tax account, like a traditional IRA, might save you money in the long run.
There are other rules to keep in mind, too. For instance, employer-sponsored accounts like 401(k)s have far higher contribution limits than traditional IRAs do, but are not as easily available to those who are self-employed or unemployed. And while Roth IRAs may offer tax-free growth, they’re not available to people who make more than the IRS’s income limits — $153,000 for single filers and $228,000 for those married and filing jointly in 2023.
As always, seek guidance from a financial planner if you have specific questions about which type of account will be best for your own retirement savings goals.
Once you’ve figured out the right retirement account type, you’ll need to select which financial institution should provide it. While it may seem arbitrary, choosing the right brokerage can help you save money on account fees, increase your available investment options, and ensure you have access to the most accessible and easy-to-use online account management tools.
There are plenty of places online where you can research the different options available, and you may also get a recommendation from a financially savvy friend. But no matter which brokerage you choose, be sure it’s a reputable institution. Generally, it helps to worth with FINRA- and SIPC-member institutions to ensure the safety and security of your money.
Now for the fun part: the actual 401(k) to IRA rollover! To initiate the rollover process, you’ll need to contact your current account custodian — or, if you’re not sure who that is, your employer’s HR department. They’ll give you more instructions, but chances are you’ll need to fill out some paperwork (or, in this day and age, digital forms) to arrange for a direct rollover to the new account.
You can also do an indirect rollover, which involves the institution cutting you a check to contribute manually, but a direct rollover is the best way to avoid early withdrawal penalties and income taxes. Always follow IRS guidelines and, again, consult with a tax advisor if you feel you need personalized advice.
Beneficiaries are the people who benefit from your account if you were to pass away. In other words, whoever you name as your account beneficiary (or beneficiaries) will have access to your funds in the event of your death. Although it might not be the first thing on your mind when considering your rollover options, it’s critical to update beneficiary information once your new account is established to ensure that your personal finance wishes are carried out if the worst should happen.
Check with your account custodian or brokerage to learn how to designate primary and contingent beneficiaries — it should be as simple as logging in and providing a name and Social Security number.
It’s also a good idea to set yourself a reminder to review and update beneficiary information periodically.
Even with all the benefits of consolidating retirement accounts, nothing is risk-free — and it’s crucial to be aware of potential issues that may arise during the process. By understanding these potential challenges, you can make more informed decisions and avoid costly mistakes… or an unpleasant surprise come tax time.
As we’ve seen, different types of retirement accounts have different tax treatments — and if you convert a pre-tax account into an after-tax account, you will, somewhere in the interim, need to actually pay those income taxes.
Additionally, you should understand the Required Minimum Distribution, or RMD, rules associated with different types of retirement accounts. (The short version: with traditional IRAs, you’ll be required to start taking withdrawals once you reach a certain age, while with Roth IRAs, you’ll never be required to do so within your lifetime.)
Once again, this is not the place to get personalized tax advice; only a tax advisor can do that. So if you’re making big money moves this year, set a quick appointment with your favorite financial planner to get the full scoop on all potential tax implications surrounding your rollover, including often-overlooked caveats like the Roth five-year rule.
Retirement accounts are great for saving money for retirement, but usually not for short- or even medium-term financial goals. Except in certain specific circumstances, taking withdrawals before you reach the IRS’s designated retirement age will result in early withdrawal penalties, and that includes the rollover process if it’s not completed correctly.
For example, say you initiate an indirect rollover, which means your current account custodian cuts you a check to contribute to another retirement account. If you fail to do so within 60 days — or deposit less than the balance of your old account — you’ll be subject to both the early withdrawal penalty.
To make matters even more complicated, your old account custodian is required by the IRS to withhold 20% of the funds for tax purposes, which means you’ll need to make up the balance out of your own pocket. That’s why it’s always recommended to do a direct transfer to ensure a penalty-free rollover experience.
Not all accounts — or platforms — are created equally when it comes to your investment options. For example, an employer’s plan may have only a few pre-selected investment options to choose from, whereas a brokerage will usually have a much wider range of investment options available to its customers. Still, the specifics vary a lot based on which financial institution you choose, so shop around a bit before you settle on one.
Consolidating your 401(k) and IRA accounts can bring a lot of benefits to your financial life, including simplified account management, reduced maintenance and trading fees, and optimized investment strategies. By following the steps outlined above, you can simplify your retirement savings journey and make more informed decisions about your financial future.
Not sure where to start with consolidating your retirement accounts? We’re here to help!
The expert team at Capitalize can help manage the entire process and provide the support you need to easily consolidate old retirement accounts and get your retirement savings right where you want them.
Consolidating your retirement accounts might be an important part of your overall financial planning for the future. With the right investment advice and a clear understanding of your options, you can optimize your retirement savings and achieve your long-term financial goals.
We can’t wait to help you get started.