Chances are, you'll probably hold quite a few jobs in your lifetime, and you may also accumulate several retirement accounts along the way. You're free to leave that money where it is when you head for greener pastures, but you can also consolidate your retirement accounts by rolling over old 401(k)s into your new 401(k) or into an IRA. Here are a few reasons consolidating your retirement accounts might be the better approach.
1. It's easier to manage your savings when they're all in one place
The most obvious reason for consolidating your retirement accounts is that it's easier to manage your savings when they're all together. You don't have to worry about forgetting about that old 401(k) from your first job 20 or 30 years ago or about not distributing your money appropriately across a variety of assets and sectors because you didn't realize what you already had. As you age, your risk tolerance will decline, and you'll have to readjust how your assets are allocated. This is easier if you can see everything in one place.
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Having a single retirement account makes it easier for your heirs, too, if you leave any money behind when you die. They'll only have to divide up and transfer money from a single account rather than chasing down two, three, or four retirement accounts in your name.
2. You may be able to reduce what you're paying in fees
Some 401(k)s can charge fees in excess of 1% of your assets per year. That amounts to $10,000 annually on a $1 million portfolio, and you'll keep paying those fees even after you're no longer contributing to that retirement account. It might have been worth paying those fees if you were also getting a 401(k) match from your employer at the time, but once you quit and that benefit disappears, the costly fees will hamper the growth of your savings, and you won't have any more money coming in to offset these costs.
Transferring that money to an IRA or another 401(k) could help you save on fees. IRAs usually have lower administrative costs. And they give you greater freedom to invest your money how you choose, so you can stick to low-cost investments, like index funds, and reduce your annual fees considerably.
3. It makes it easier to remember required minimum distributions (RMDs)
The government says that everyone must begin taking required minimum distributions (RMDs) from all of their retirement accounts except Roth IRAs at 70 1/2, unless they're still working and own less than 5% of the company they work for. You can calculate how much you must withdraw each year by dividing each retirement account's balance by the distribution period next to your age in this worksheet.
Failure to take out at least this much from your retirement accounts annually results in a 50% penalty on the extra you should have withdrawn. While it is possible to take RMDs from many retirement accounts and avoid penalties, it's easier to manage this if you have your money in fewer accounts.
How to consolidate your retirement accounts
First, make a list of all the retirement accounts you own and decide what you'd like to do with older 401(k)s or IRAs you're no longer contributing to. If you like your new 401(k) a lot, it might make sense to roll your old 401(k)s over into this account. Otherwise, you can move all of your money into an IRA that you set up with any broker you choose. If you have some tax-deferred and some Roth retirement savings, you'll need a separate account for each type.
If you'd like to transfer money to your current 401(k), you must first make sure that your new plan accepts 401(k) rollovers. Check with your company's HR department to see if this is possible; if it is, ask where you should send 401(k) rollovers. Then, contact your former employer or the company managing your 401(k) and ask for the necessary paperwork to complete the rollover. There may be a one-time rollover fee.
Rolling over your old 401(k)s to an IRA is another option -- and it may be your only option if your new 401(k) doesn't permit rollovers. Open an IRA if you don't already have one. Then, simply request the paperwork from your employer to have the funds transferred to your new IRA. This is called a direct rollover, and it's the best option for most people because it minimizes your risk of being hit with early withdrawal penalties and owing tax on those funds.
Another option is to have your old employer or plan administrator cut you a check for the amount in your 401(k). If you place all of this money in a new retirement account within 60 days, it won't be considered a distribution and you won't pay any taxes or penalties on it. But if you fail to place it in a new retirement account within this time, it's considered a distribution and you'll pay taxes on the funds -- if they come from a tax-deferred retirement account -- plus a 10% early withdrawal penalty if you're under 59 1/2.
It might seem like a headache, but consolidating your retirement accounts is actually pretty straightforward and doesn't take too long. Just make sure you understand the rules surrounding account rollovers so you don't run up an unexpected tax bill.
