March 30, 2022

Keep This in Mind When Consolidating 401(k)s or IRAs

Americans switch jobs often — every five years on average, according to the Bureau of Labor Statistics. Switching may be great for satisfaction and pay, but it can complicate retirement planning.

That’s because you have to open a new 401(k) retirement savings account at every new job. You might end up with five or six different accounts when all is said and done, having to manage different investments through different companies.

That’s why more people are choosing to consolidate their retirement accounts into a single account. Consolidating means you only have to oversee one set of investments from one central hub. It also means that you only have one set of fees to pay, instead of multiple fees.

Merging your accounts doesn’t have to be complicated, but here are some important things to keep in mind during this process:

Choose Your Destination

You have two main options when consolidating retirement accounts: you can roll your old 401(k)s into your current employer’s 401(k) or you can move that older money into a personal IRA that doesn’t change when you switch jobs. There are pros and cons on both sides: IRAs may offer more investment options than 401(k)s, and you can use them to pay for expenses like education without incurring tax penalties, but they often have higher fees and costs. 401(k)s can offer lower expense ratios and come with financial planning or educational services, but not all employers let you roll in 401(k)s from previous jobs. What matters is finding an account that’s easy to use and encourages you to save as much as possible.

Be Direct

Direct rollovers are a fast way to consolidate your retirement accounts and allow for assets from your former plan to be sent directly to your new retirement account. Many financial companies now accept direct rollover requests online or over the phone, which makes it simple to move your retirement assets into one account. To request one, gather recent statements for all your accounts and contact the financial company or employer that manages your retirement plan to confirm their rollover requirements . By requesting direct rollovers, the money will be merged into the single account you’ve designated. 

The Roth Exception

One factor to consider when consolidating your retirement accounts is if you would like to convert any pre-tax employer accounts to a Roth account.  Roth accounts start with after-tax dollars, so the withdrawals are tax-free when you retire. Pre-tax 401(k)s and traditional IRAs, by contrast, defer taxes on the front end but are taxed upon withdrawal. So, when you’re converting a former retirement account into a Roth account, you have to pay taxes on what used to be tax-deferred funds. Paying taxes now can be worth it, however, time and wise investing may build up a bigger untaxed nest egg to fund your retirement. 

Other People’s Money

You and your spouse may have multiple retirement accounts between you, but you can’t combine them all into one account. Remember that IRAs and 401(k)s are individual accounts, so you can only consolidate accounts in your name. That said, you can consolidate any retirement accounts you inherit from a relative who passed away and named you as their beneficiary.

At Plimoth Investment Advisors, we partner with you to craft a retirement plan that lets you live the life you’ve worked hard to achieve. We’re here to answer any questions you have about everything from rolling over your old retirement accounts to growing your money securely. Get in touch with us today to start the conversation!

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