How many retirement accounts do you have? By age 50, baby boomers have held an average of 12 different jobs--half of them since age 24--according to the Bureau of Labor Statistics. So, you might have several 401(k) accounts from old employers, as well as an IRA, a Roth IRA, and maybe a SEP-IRA you set up to save income from gig work.
Michael Garcia, a wealth management advisor with Merrill Lynch in Dallas, Texas, just brought on a new client, retiring from his business at age 70, who came with four different traditional individual retirement accounts at four different financial institutions. “He said he opened up the different accounts to diversify, but they were all in large cap mutual funds,” Garcia says. Now, Garcia is helping him consolidate everything into one IRA, diversify investments, and estimate expenses for 25 years. “Consolidating, that’s just the first step; you have to make sure there’s a plan, and implement it,” he says.
While having more retirement dollars is a good thing, having more accounts isn’t so. By combining accounts, you may be able to cut fees and keep better track of your asset allocation---thus building more wealth. You’ll also reduce hassles later when you start drawing from the accounts (required minimum distributions typically start at age 70 ½).
Here are two key rules to help you declutter.
1: Always combine accounts by rolling funds directly from one custodian to another (that’s known as a trustee-to-trustee transfer). Don’t take out the money and move it yourself.
2: Only certain types of accounts go together. So traditional IRAs can be merged with other traditional IRAs, but not with Roth IRAs. In a more complicated move, you can rollover a traditional IRA into a Roth IRA, paying a “conversion” tax, which is essentially the income tax on the rollover. From then on, your money grows tax-free in the Roth.
Some accounts have tricky rules: To move a SIMPLE IRA, there’s a two-year waiting period. The Internal Revenue Service publishes a handy Rollover Chart here.
Money held in an ex-employer’s 401(k), 403(b) or 457(b) plan can be rolled into a current employer’s plan---so long as the new employer allows it. Alternatively, funds from an old workplace can be rolled into the appropriate IRA, with pre-tax savings going into a traditional IRA, and 401(k) Roth money going into a Roth IRA.
And some 401(k) plans even let you transfer in IRA money. That’s useful if you want to do a move that Congress recently blessed in the December tax overhaul called a backdoor Roth IRA. If you don’t have a traditional IRA, you can do the backdoor Roth IRA at no tax cost.
To consolidate prior 401(k)s and IRAs into a new 401(k), you have to fill out the distribution form with the old employer or IRA custodian, and fill out a rollover form with your new employer, and watch to make sure the transfers happen. Why don’t more employees do it? “It’s upfront work for the employee,” says Robert Lawton, a retirement plan consultant in Milwaukee, Wisconsin, adding, “It’s something more employees should take advantage of, and they don’t.”
