Most of us tend to work for multiple companies over our careers; that means we’ll likely have old 401(k) plans hanging around out there, collecting dust. Is it a good idea to consolidate them or not? Here are six reasons to consolidate your retirement accounts – and two reasons not to.
Reason to Consolidate #1: It’s 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 – we’re up to five accounts now. Making sure you have the right investments in the right accounts isn’t easy.
If one of you has multiple IRAs or 401(k)s, then you’re 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.
Reason to Consolidate #2: Old 401(k) Plans Have Limited Investment Options
It’s hard to have a nuanced, truly diversified portfolio when there are only a few investments to choose from. By rolling your old 401(k) plan into an IRA, you’ll then have an entire universe of stocks, bonds, mutual funds and ETFs at your disposal.
Sadly, not all 401(k) plans are good ones.
I’ve seen plans with as few as a dozen investment options and entire asset classes were missing. If you consolidate your retirement accounts, you’ll have more (and cheaper) options.
Reason to Consolidate #3: Old 401(k) Plans Can Have Higher Fees
While it used to be much worse, 401(k) plan investments typically carry higher fees than you’d find in an IRA. Back in 2012, the Department of Labor required 401(k) administrators to begin disclosing their fees to plan participants. That was a good thing – plan expenses started dropping quickly, as you’d imagine.
Still, account and investment fees in 401(k) plans tend to be higher when compared to an IRA.
Reason to Consolidate #4: It’s Less Complicated at Tax Time
If you’re making account additions or withdrawals across multiple retirement accounts, consolidating will make tax time much simpler. You’ll only have one set of forms to worry about. Taxes are hard enough already!
Reason to Consolidate #5: Calculating RMDs is Much Easier
If you’re old enough such that you are subject to Required Minimum Distributions (RMDs), then having multiple retirement accounts makes tracking these RMDs much more difficult.
Given that you’re charged a 50% excise tax on the RMD amount you don’t withdraw, it’s crucial to get these calculations right. Consolidating gives you just one account to worry about and track.
Reason to Consolidate #6: 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 that’s 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 someone’s 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. Let’s go over a couple of reasons to consider not consolidating these accounts.
Reason NOT to Consolidate #1: Backdoor Roth IRA Contributions Are More Complicated
If you’re a high earner and have hit the income limitations for annual Roth IRA contributions, then the back-door Roth IRA contribution strategy may still be there for you.
However, if you roll your 401(k) over into an IRA, then the tax treatment of these back-door Roth IRA contributions becomes even more complicated and may make the entire process less advantageous. If you want to use this tactic every year to add funds to your Roth IRA, then consolidation may not be a good idea at this time.
That being said, the size of the 401(k) and the quality of its investments should be considered here. If you have a $1 million 401(k) with limited investment options and high fees, it may be a good idea to consider the IRA.
Reason NOT to Consolidate #2: You May Lose The Ability to Take a 401(k) Loan
Taking a loan from your 401(k) isn’t always the best idea, but I needed to include it on this list. If you’re in a spot where you may need emergency cash – and you need it for longer than the 60 days you’re allowed for an IRA rollover, then maybe this is a consideration.
In most cases, consolidating accounts tends to be the best move, but it’s not always a cut-and-dried situation. If you’re wondering if you should consolidate your retirement accounts, then click here to set up a quick, complimentary introduction call to see if Prana Wealth is a good fit. We do still have the capacity to take on new clients this year.
As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. In the past, we’ve helped plenty of clients make their investments more efficient by consolidating their accounts. We’re here to help you when you’re ready.