Why Should I Consolidate My 401ks
Consolidating your retirement accounts offers several potential benefits:
- Less administrative hassle. Youll receive just one account statement, making it easier to keep track of your funds. Consolidating your accounts also simplifies required minimum distribution calculations and tracking.
- No overlap. If you have multiple accounts, that doesnt necessarily mean that your investments are properly diversified. In fact, your money may be invested in similar asset classes with significant overlap. Consolidating your retirement accounts gives you a clearer view of your asset allocation picture, as well as any adjustments you may need to make.
- Easier rebalancing. Any retirement savings account requires periodic rebalancing to keep it in line with your objectives. By consolidating your accounts, youre more likely to achieve a cohesive investment strategy.
Make The Best Decision For You
When it comes to deciding what to do with an old 401, there may be factors that could be unique to your situation. That means the best choice will be different for everyone. One thing to remember is that the rules among retirement plans vary so it’s important to find out the rules your former employer has as well as the rules at your new employer.
Do also compare the fees and expenses associated with the accounts you’re considering. If you find it confusing or overwhelming, speak with a financial professional to help with the decision.
Can I Combine My 401 K Accounts
If you have all 401 K accounts, you may wonder if you can combine them. The answer depends on the administrators rules. If its an old 401 K, though, you cannot make new contributions to it, so the answer is no.
If you have a new 401 K with a new employer, they may allow rollovers from an old 401 K but only for a limited time. Ask your administrator what they do and dont allow to determine if this is an option.
If you cant consolidate them, you may wonder, what can I do with multiple 401 K accounts? The good news is you can roll them over into traditional IRA. There arent any rules regarding rolling them into an individual account, plus this puts you in control of how you invest the funds versus dealing with an administrator.
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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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Reasons To Keep Old 401 Accounts Where They Are
While simplicity and investment clarity are typically improved by consolidating accounts, there are reasons to keep at least one 401 active. If you are utilizing Roth Supercharge or back-door Roth retirement savings strategies, having money in a 401k versus an IRA can help you pass the pro-rata rule and ensure that those strategies are possible. Second, some 401ks have a still working provision in their plan that allows you to delay taking RMDs while you are still working. So, if you have a 401k at a company where you foresee yourself staying in well past retirement age, keeping some assets in that 401 account can be an advantage.
Everything In One Place Means Less Record Keeping
When you have many different accounts, you can become swamped by emails, calls, and statements. Its easy to lose important information and notifications this way, and you may even forget about old 401ks.
When you consolidate your 401k or retirement accounts in general, you greatly reduce the time spent on record keeping. You also reduce the risk of missing important notifications. As you age, your risk tolerance also declines, and you may need to readjust the allocation of your assets. This is a lot easier to do when you can see everything in one place.
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What To Consider When Choosing A Broker
If youre planning to roll over your 401 into an IRA, youll likely be most concerned with a broker that can do the following things best. Most brokers do offer an IRA, but some popular ones do not, but the brokers above all offer IRAs. We also considered the following factors when selecting the top places for your 401 rollover.
- Price: Trading commissions for stocks and ETFs have fallen to $0 at most online brokers, and thats great for investors. But there are other costs, too, perhaps most notably account fees, such as fees for transferring out of your account.
- No-transaction-fee mutual funds: The brokers in the list above offer thousands of mutual funds without a transaction fee. If youre rolling over your 401 and you like the mutual funds you have already, these brokers may allow you to buy and sell the same one without a fee.
- Investing strategy: While a 401 may limit your investing options to a pre-selected group of mutual funds, an IRA gives you the ability to invest in almost anything trading in the market. So we considered how each broker might fit an investors needs.
Solution : Explore All Of Your 401 Rollover Options
When separating from an employer, you have more options than just keeping the old 401 as is or rolling it over to a new 401. From rolling over to a Roth 401 or to a traditional IRA, evaluate all of your available options so that you can consolidate your nest egg on the account most suitable to your retirement saving strategy.
For more details, read:
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Option : Rolling Into An Ira
Rolling all old 401 accounts into a Traditional IRA of your choosing is a popular choice that allows you maximum control over the investments within the account.
Pros:
1. You choose the institution
You get to choose where to open your individual retirement account. By choosing an institution, you can choose somewhere that tailors specifically to your needs. You will have control over your investment choices and whether to use an institution that charges for certain services.
This may be especially important if the institution that holds your current 401 charges account maintenance fees or only offers high-cost investment products.
2. Youll always control it
You open a Traditional IRA on your own and without an employertherefore, a Traditional IRA is always and only yours. Some people may find it helpful to think of a Traditional IRA as a home base for their tax-deferred money. As you move through your career, you can roll old 401 accounts into a Traditional IRA thats not going anywhereits your home base.
3. More investment options
As compared to some 401 programs, a Traditional IRA opened at an institution of your choosing may have more options for investing.
Cons:
1. You may still have multiple accounts to maintain
Even if you open a Traditional IRA, you may still want to contribute to your active 401. Therefore, you will need to maintain at least two retirement accounts.
2. It may complicate a backdoor Roth IRA
How to do it:
Becoming A Victim Of A Cash Out Or Move To A Forced
When you leave in a hurry, like we described in the move to the second job from our example, failing to provide clear instructions on what to do with your 401 can come back to bite you in the near future. According to a Plan Sponsor Council of America survey of 613 plans with 8 million participants, 57% of 401 plans with balances between $1,000 and $5,000 are forcefully transferred to an IRA of the plans choosing when the owner of the 401 doesnt indicate what to do after separation from employment.
Imagine your plan administrator having no mailing address for you and trying to mail you a cash out check. Once the check is cut, youre liable for the income taxes, early penalty fee when under age 59 ½, and additional penalties and taxes from your state, if applicable. On the other hand, a forced-transfer IRA is no better: the GAO warns that high fees and low returns can make plans with low balances decrease to $0 within a period of 30 years.
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What Is A Retirement Plan Indirect Rollover
An indirect rollover occurs when you receive a pre-retirement payment from your retirement plan and put it into another retirement plan. You don’t go through the formality of rolling it over directly. With an indirect rollover, you receive a direct payment and have 60 days to deposit the money into a different retirement account without paying taxes and penalties.
Account For All Your Retirement Savings Accounts
First, review your financial records to assess how many 401 and other retirement accounts you have, where theyre located and their balances. Maybe you have one or more 401 accounts from multiple employers. Maybe you rolled over a 401 account from a previous job into a new 401 or a traditional IRA, or perhaps you cashed out instead.
If you find a retirement account youve forgotten, avoid treating it like an unexpected windfall. If you have a 401 balance that you feel is small, the worst thing you can do is to just cash it out, says Jacob Kujala, an advanced insurance planning specialist at U.S. Bancorp Investments.
If you leave your previous 401 in place, your investments have the potential to compound over time. Conversely, repeatedly cashing out can set back your retirement savings. In addition, if youre younger than 59½, withdrawing money from a 401 will generally trigger a 10% penalty plus federal and state income taxes on the distribution.
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We Can Help You Consolidate And Maximize
Consolidating can mean greater returns and less headache in the future, but it can be challenging to navigate the process. If you have multiple retirement plans, or a current 401 in need of professional management, we would love to talk about how we can help you maximize your returns during a complimentary get-acquainted meeting. You can reach us by calling 377-4963 or emailing . You can also book an appointment online here.
Perritt Capital Management, Inc. is the Registered Investment Advisor for Windgate Wealth Management accounts and does not provide tax advice. Consult your professional tax advisor for questions concerning your personal tax or financial situation and your insurance agent for insurance advice.
Data here is obtained from what are considered reliable sources however, its accuracy, completeness, or reliability cannot be guaranteed.
First published September 2022.
Calculate Required Minimum Distributions
After you reach age 72*, the IRS requires you to distribute some of your retirement savings each year from qualified retirement accounts like 401s, 403s, and most IRAs.
You have to take out a certain amount from your account every year, although you can choose to take out more if you want. While most financial institutions calculate your RMD for you, ultimately, youre responsible for withdrawing the correct amount.
Withdrawing less than your RMD, or missing the deadline, can lead to a tax penalty of up to 50% of the amount you were supposed to withdraw, so youll want to stay on top of it.
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Less Confusing For Beneficiaries
When you pass, your beneficiaries get your retirement accounts. If you have multiple accounts, its easier for them to miss one or two, letting your money go unused. Give them to a manager, certified financial planner, or another financial professional to worry about and consolidate your retirement accounts.
Can You Have More Than One 401 Account
Yes, you can, but having multiple 401 plans floating around isnt a good idea and should be avoided. Over the 1994-2014 period, 25 million 401 holders separated from an employer and left at least one account behind and several millions of those holders left two or more 401s behind. A combination of limited portability of old 401 funds into new 401 plans, potential for forced-transfer into an IRA account, and automatic enrollment into new 401 plans sets the stage for more and more Americans owning multiple 401 plans throughout their careers.
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Have The Money Directly Rolled Into Your Ira
You want to avoid tax liabilities and penalties for early withdrawal of your retirement plan funds. To do this, you must roll the funds over to the account directly or at least within 60 days.
The easiest way is to have the administrator write the check directly to your new retirement account. You never receive money in hand, so you dont pay taxes or penalties.
If the administrator will only issue the funds to you, deposit them in the new retirement account immediately or at least within 60 days to avoid taxes or penalties.
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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.
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Ira Cash Management Investments: What To Look For
So, when looking for investments to meet your cash management needs in an IRA, here are some things to look for:
- Make sure youre comfortable with the safety of the investment, such as whether or not its covered by federal deposit insurance.
- Line up the timing of when the investment makes cash available with the timing of your IRA distribution plans. Remember that the longer youre willing to commit your money, the higher the interest rate youre likely to get.
- Shop around and compare rates on CDs and other cash management products.
- Besides comparing rates, watch out for fees that may offset the interest you earn.
IRA Rollover Investments: Growth for Longer-Term Needs
Just because youre rolling out of a retirement plan doesnt mean you should stop investing for growth.
In particular, if youre rolling out of a plan because youre leaving an employer but still have many years to go before retirement, your rollover investments should be growth-oriented.
Even once you reach retirement age, keep in mind that you still have many years worth of retirement spending to fund with your investments. It may make sense to have at least some of them in growth investments to help you keep up with inflation.
David Fabian Managing Partner Fmd Capital Management Llc
@DavidFabian04/23/15 This answer was first published on 04/23/15. For the most current information about a financial product, you should always check and confirm accuracy with the offering financial institution. Editorial and user-generated content is not provided, reviewed or endorsed by any company.
Often times it is easier to trade and invest in fewer accounts, which can lead to better savings and long-term growth. This is particularly true for smaller legacy accounts that have have been left untended for some time. However, you can’t always consolidate every type of retirement account. You will have to research with your brokerage company the rules involved in transferring and consolidating investment types. They should be able to walk you through the process and ensure that you don’t create any adverse tax consequences.
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