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Retirement Planner,Ahwatukee

Consolidating Retirement Accounts

Job changes can leave a chain of stranded 401(k)s under former employers’ plans until retirement. But that may not always be the best strategy. Consolidating can reduce paperwork and make it easier to balance investments, monitor their progress, plan a withdrawal strategy and update beneficiary changes. It may reduce administrative fees, which can add up over time, especially when factoring compound interest.  Consolidating may also qualify investors for price breaks based on asset and trading thresholds.

While employer plans often accept rollovers from previous accounts, it’s wise to weigh the pros and cons of rolling former employer accounts into a personal IRA. Many 401(k) administrators don’t dispense individual advice to ensure investors make optimal choices for their situations. IRAs usually offer more personal control and flexibility. Typically, 401(k) plans include a few dozen funds to choose from, while IRAs encompass thousands of investment choices.1,2

IRA accounts can also provide more freedom in passing on funds. Under federal law, surviving spouses automatically receive their deceased spouses’ 401(k)s – unless the survivor has signed a waiver. IRAs usually allow multiple or contingent beneficiaries. The SECURE Act recently eliminated stretch IRAs, which allowed children and grandchildren to take minimum distributions from an inherited IRA over their lifetimes. However, there won’t be any tax on Roth withdrawals.

On the other hand, 401(k)s carry some unique benefits. They are protected from all types of creditor judgments. Traditional and Roth IRA assets up to $1,362,800 are shielded from bankruptcy claims, but safeguards from creditors in other types of lawsuits vary from state to state. If you leave your job after the age of 55, you can take penalty-free withdrawals from a 401(k) account. The minimum age for withdrawing from an IRA without a penalty is 59½. You can take up to a five-year loan from a 401(k); an IRA only affords a 60-day, tax-free rollover option. (The CARES Act provides some exceptions for early withdrawals from 401(k)s and IRAs and increases 401(k) loan amounts in 2020.)

Of course, it’s crucial to consider potential fees and tax implications before consolidating. It’s particularly wise to consult a tax professional if your 401(k) includes employee stock, as special tax rules may apply. Our office would be happy to help you decide if consolidating your accounts would be beneficial and to help you weigh advantages and disadvantages of rolling 401(k)s into a personal IRA.