Reason To Consolidate #: Its Easier To Manage Your Investments
Implementing an investment strategy across a brokerage account, an IRA and a Roth IRA is hard enough. For couples, that compounds with an additional IRA and Roth IRA were up to five accounts now. Making sure you have the right investments in the right accounts isnt easy.
If one of you has multiple IRAs or 401s, then youre making your investment management harder than it needs to be. In addition, you may also be paying more in account and transaction fees. Consolidating makes managing your investments easier.
Expenses Of An Ira Vs A New 401
When deciding whether to roll over your 401 to your new companys plan or to an IRA, you should weigh the investment costs.
A lot of people assume a 401 or other qualified plans are free for them, Hopkins says. They are not you pay the fees on the accounts. If you go with a low-cost IRA, the fees can be less than a 401 plan.
Should I Rollover My 401 Into An Ira
In most instances, you are better off rolling over your 401 into a traditional IRA, for which you will pay taxes on the monies when you withdraw them, according to Matt Markowski, a principal of Markowski Investments in Tampa, Florida.
However, if you think your tax rate will go up in your golden years, it may make sense to do a Roth IRA conversion, in which you would pay taxes on the amount converted from your 401, but the not have to pay them on future distributions.
It all depends on what you think your tax rate will be in the future, Markowski says.
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Combining It All In A 401 Or Ira
If you prefer a single account, you may be deciding between a 401 or IRA. You could combine your accounts from past employerssuch as 401s, 403s, and 457sand IRAs into your current employer-sponsored retirement account. Or you could roll over those past accounts into an IRA. Whichever direction you go in, be sure to factor timing into your decision. If youre still working, the IRS limits let you contribute more to an employer-sponsored retirement plansuch as a 401than to an IRA. And if you retire at age 55 and your employers retirement plan allows partial withdrawals, you may be able to take money out without paying a 10% early withdrawal penalty. On the other hand, IRAs may give you access to many more investment optionsand that may be your deciding factor.
The important thing is to maintain your retirement accounts tax-advantaged status, which is what sets your 401s and IRAs apart from your personal savings accounts. One approach is to roll over the funds directly to your retirement plan account or IRAbecause withdrawing money and depositing it in any other type of account could leave you with taxes and penalties to pay. If youve been saving in Roth accounts, youll have to manage those amounts separately from your traditional 401 contributions. And in case you were wondering, you can only consolidate your own accountsyou cant include your spouses.
Why You Should Consolidate Those 401s And Iras
- Around 25 million Americans left behind money in a 401 when separating from an old job from 2004 to 2014, according to a study from the Government Accountability Office.
- Merging multiple 401s and/or IRAs generally makes things like portfolio rebalancing and mandatory account withdrawals much simpler.
- When leaving a job, savers are typically better off moving an old 401 account to their new workplace plan instead of an IRA, according to some financial experts.
Many Americans hold multiple retirement accounts and there are many reasons why they should consider combining those nest eggs instead of letting them gather dust.
Around 25 million Americans left behind money in a 401 account when separating from an old job, according to the Government Accountability Office, which analyzed 10 years’ worth of data from the 2004 to 2014 period. Millions left behind money in two or more accounts.
That represents about 37% of the roughly 68 million workers actively saving in a 401-type plan through their workplace, according to figures from the Labor Department.
The relatively high incidence of stranded 401 funds is understandable, given that workers over age 25 only stay at the same job for around five years, according to the Bureau of Labor Statistics.
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They can also cash out balances less than $1,000 and send a check.
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Merging Your 401s And Iras Can Minimize Taxes Avoid Penalties And Simplify Rmds Just Be Sure To Follow The Rules
If you’ve worked for multiple companies in your lifetime, you probably have had several different 401 plans, some of which you may still own. You also may have a couple of IRAs, a Roth IRA, and a brokerage account or two.
At some point, you may think consolidating some of the accounts would be a smart approach, helping you organize and track your investments and perhaps save some money with fewer account fees. If so, you arent alone. An Investment Company Institute survey of traditional IRA owners who rolled employer money into IRAs found that consolidating assets was among the reasons they opened their accounts.
A typical employee who has worked for 30 years likely has switched jobs six or seven times and may have just as many former employer plans, according to Terry Dunne, senior vice president at Millennium Trust Co. From 2005 through 2015, 25 million participants in workplace plans separated from an employer and left at least one account behind. Millions more left two or more accounts behind.
Consolidating your employer plans in one IRA instead retains the tax-advantaged status of the assets, allows more choice of investments and ensures you remain in touch with your assets, Dunne says.
Taking Advantage Of One Retirement Plan
One account can be easier to managewith one statement and one number to call if you have questions or need help. Having all your retirement savings in a single account offers you a number of advantages, including:
- A more complete view of your retirement picture and any ongoing activity
- An easier way to track your progress toward your retirement savings goal
- Potentially fewer, and lower, fees than you were likely paying for multiple accounts
- Help focusing on a single investment strategy for your retirement investments
Even if you kept multiple accounts, you still couldnt contribute more than the annual IRS contribution limits. And if youre nearing retirement, a single account may make it easier to calculate and take your required minimum distributions , which, for most of us, will start at age 72.
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What’s The Difference Between A Rollover And An Asset Transfer
The main difference between a rollover and an asset transfer is where the money is held before it’s moved to Vanguard. If you’re moving money to Vanguard from:
- An employer-sponsored plan, such as a 401 or 403, you can initiate a rollovertypically, when you change jobs or retire. When you roll over retirement plan assets, you’re moving them from a group plan into an IRA .
- An IRA at another financial institution, you can initiate an asset transfer, tax-free. You can also transfer securities held in a brokerage IRA at another financial institution into a Vanguard Brokerage IRA.
Reason To Consolidate #: You Make Your Estate Planning Much Easier
Not only are multiple accounts more difficult to track, having multiple accounts creates more work for your executor and heirs, if thats important to you. In addition, each retirement account has its own separate beneficiary designation, making potential estate planning changes more difficult.
I heard a story once where someones ex inherited a very large retirement account because the beneficiary designations were never updated!
So right now, you may be leaning toward consolidating some of your retirement accounts. Lets go over a couple of reasons to consider not consolidating these accounts.
How To Do A Rollover
If you decide to roll over your 401s, opt for a direct rollover that leaves you out of the transfer process. Once you complete some basic paperwork, the firm where you have your IRA will contact your old employer and they will get the money transferred straight into the IRA.
If you have company stock in your 401 that has appreciated a lot, you may want to explore a separate IRA rollover for just the stock. An arcane Internal Revenue Service rule called net unrealized appreciation can reduce the tax bill you will owe when you eventually sell those shares. Thats one more valuable way to boost your retirement income.
What Is An Ira Rollover
An individual retirement account, more commonly known as an IRA, is not a specific type of investment. Its a structure that has tax advantages to help you save for retirement.
You can use the money within that structure to invest in a wide range of investments, from CDs and savings accounts to stocks and bonds.
There are two main types of IRAs: traditional and Roth IRAs:
- With a traditional IRA, you dont pay taxes on money going into the plan nor on investment gains. It is only as the money is withdrawn when you reach retirement age that you have to pay income tax on it.
- In contrast, contributions to a Roth IRA are not tax-deductible, but then you dont pay any more taxes on that money as your investments grow or when you take money out of the plan upon reaching retirement age.
Basically, IRAs offer you a choice of whether to be taxed now or when you reach retirement age . People generally base this decision on whether they expect to be in a higher or lower tax bracket once they reach retirement age.
You can start an IRA by making annual contributions, but IRA rollovers are funded from money coming out of another qualified retirement plan such as a former employers 401 plan. A rollover allows you to leave a retirement plan without incurring any tax consequences.
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What Is The Financial Impact On My 401 If I Get A Divorce
If you have a leftover 401 account from before you were married, you should consider the community-property ramifications before rolling it over into an IRA, according to Pam Friedman, an Austin, Texas-based certified financial planner and certified divorce financial analyst.
If you marry and then consolidate, you may have inadvertently co-mingled funds, converting separate property to community property, unless you go through the expensive process of trying to trace the source of funds during divorce, Friedman says.
Instead, you may want to roll over a 401 whose funds were allocated before your marriage to a new IRA account, so that the lines are clear as to which funds are community property and which are separate property, Friedman says.
Heres An Example Of How You Can End Up With Multiple 401 Retirement Accounts:
On your first job, you signed up for your employer-sponsored 401 and accumulated a balance of $1,500 after two years. At that point, you accepted a dream job all the way across the country and had to arrange a big move. With so many moving pieces you forgot about your 401 and left no instructions to your plans administrator.
On your second job, youre automatically enrolled in a new 401 and accumulated a balance of $9,000 over a four-year period. Fast forward to today, you decide to accept a new job offer and find that the third employers qualified plan doesnt accept rollovers from other 401 plans. Since youre happy with the 401 from your second employer, you decide to leave the $9,000 there. You remember your 401 from your first job, and you contact the plan administrator and find out that the balance of that account is now at a forced-transfer IRA.
In summary, now you have:
A forced-transfer IRA account from your first employer
A 401 from your second employer
A 401 from your current employer
Maintaining multiple 401 plans hurts your nest egg, and there are many reasons why keeping several 401 plans is a bad idea.
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Consolidating Your Retirement Accounts Can Help
Heres some good news. In most cases, you dont have to leave those accounts with your former employers. Instead, you may be able to roll them over into a single retirement account.
This is known as consolidating accounts. And it offers a lot of advantages.
Consolidating retirement accounts can make it easier to:
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Merging Roth Retirement Accounts
The need to merge Roth IRA accounts isnt typically a problem, if only because the plans havent existed nearly as long as they have for IRAs and 401s. In addition, Roth IRA plans are not typically destination accounts for employer plan distributions the way traditional IRA accounts are.
If you do have multiple Roth IRA accounts and want to merge them, the rules are similar to what they are for merging traditional IRA accounts. And its worth repeating use the direct transfer method to keep things simple and to avoid problems with the IRS.
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Reason To Consolidate #: Old 401 Plans Can Have Higher Fees
While it used to be much worse, 401 plan investments typically carry higher fees than youd find in an IRA. Back in 2012, the Department of Labor required 401 administrators to begin disclosing their fees to plan participants. That was a good thing plan expenses started dropping quickly, as youd imagine.
Still, account and investment fees in 401 plans tend to be higher when compared to an IRA.
Can I Have Both A 403 And A 401
If your employer offers both a 403 and a 401, you can contribute to both plans to boost your retirement savings. However, there are limits on the combined total of so-called salary reduction contributions you can make in a tax year.
The contribution limit is $19,500 for 2021 and $20,500 for 2022. For those age 50 and over, the catch-up contribution limit is $6,500. These are the same limits placed on contributions to either plan individually. So you are free to use both vehicles, but the caps on tax-deferred contributions remain the same.
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Consider Account Consolidation For Your Future
More of anything is frequently betterbut having multiple retirement plans from past employers could make it hard to keep track of all of them. If you decide fewer accounts will make it easier to handle your retirement portfolio, contact your retirement plan administrator or your financial provider for more information. Its important to have help managing the process, so you can make informed decisions.
Types Of Retirement Plans
Retirement plans have more benefits than simply saving money in a bank account to be used when you retire. With an employer-sponsored plan, you also benefit from years of employer matching.
What makes retirement plans really unique, however, are the tax benefits. Most plans are tax-deferred or tax-advantaged. Here are some of the most common retirement accounts you may have already picked up in your career.
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Can You Contribute To A 401k And 403b In The Same Year
In short, you are able to contribute to a 401k and 403b in the same year, but some restrictions do apply on much money you can put into either plan.
In 2018, the contribution limits state that you can make a salary deferral contribution up to $18,5000 and for those over 50 years of age, you can make an additional $6,000 contribution.
Both accounts need to be taken into consideration, with a combined contribution of $18,500 for both, or $24,500 if youre eligible for age-related catch-ups.
People who have worked with certain employers for at least 15 years might be given an extra contribution limit of $3,000.
Therefore, if youre over the age of 50 the maximum amount you can put into these accounts in a year would be $27,500.
If both of these accounts are in place with the one employer, they will usually be able to monitor how much is going in and let you know if youre close to reaching his limit.
However, for people with different employer 401k and 403b plans, they will be unable to find this out.
Therefore, its your responsibility to stay on top of your combined contributions otherwise you will be liable for hefty penalties and taxes if you go over.
How Can Married Couples Max Out Their 401
If you and your spouse are both working and the employer provides a 401, you can contribute up to the IRS limits. For 2021, each spouse can contribute up to $19,500, which amounts to $39,000 annually for both spouses. If you and your spouse are already 50 years, each spouse can make an additional $6,500 in catch-up contributions to their account. This increases each spouseâs contribution to $26,000 or $52,000 between the two spouses annually.
If your income does not allow you to max out your 401, you can maximize any employerâs match that the employer provides. Usually, an employer may match your contribution up to a certain limit. For example, if your employer offers a 5% match, and your spouseâs employer offers an 8% match, you should try to collect all the matches, since it equates to getting free money for your retirement savings. You should also compare the 401 fees you incur and the investment options that the plan sponsor provides. If the fees are too high, you can rollover 401 to an IRA with lower fees and more investment options.
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