Decluttering the Muddle of Multiple Retirement Accounts – Streamlining and consolidating multiple old retirement accounts can help you organize your retirement finances. Most employees move around these days, typically switching jobs 12 times over the course of their careers and spending about four years on average with each employer. It is no wonder that some of them amass a jumble of retirement accounts, each affected by its own rules, fees and paperwork.
A clearer picture
Whenever you are ready to think about retirement planning — which could be as soon as you are eligible for a company’s 401(k) plan — you should start considering your overall asset allocations. It is never too early to take a holistic view of your holdings and your future prospects.
When you become deluged with statements and communications for retirement plans, you may find it frustrating to grasp the unified picture. Bringing the accounts together will help you rebalance and keep a handle on your overall rate of return. Although you may believe that having more accounts will help add diversification, that may not be true. If the holdings overlap, the duplications will cancel out the advantages of spreading bets. Besides, your risk tolerance profile and financial goals are likely to change over decades.
There are compelling reasons for streamlining your retirement accounts:
- Less time monitoring.
- Fewer emails and passwords, less filing.
- Lower fees.
- More tax-efficient strategies.
- Easier maintenance of up-to-date records.
- Simpler recordkeeping for beneficiaries.
You might save on fees by whittling down a set of multiple accounts. The custodians who are legally obliged to report contributions or withdrawals to the IRS charge separate annual fees for each account. Moreover, when you consolidate the accounts, you will probably make fewer transactions, resulting in lower investment fees.
You are more likely to lose track of your current information details if you are swimming in a sea of separate retirement accounts. Collecting them together makes it simpler to keep accurate records, such as addresses if you move home or beneficiaries if you change them. Beneficiaries themselves may later struggle to deal with inherited accounts. They (or you, yourself) might face escheatment if an account remains inactive over about five years and becomes a taxable distribution.
Consolidation can also allay another hassle of required minimum distributions. At age 73, the SECURE Act 2.0 requires you take out some funds each year from qualified accounts, such as 401(k)s, 403(b)s and some IRAs. Each account will send you separate paperwork. You are personally responsible for removing the correct sum. Taking too little or forgetting a deadline could land you a tax penalty of up to 50% of the required withdrawal amount. That is one of the most Draconian penalties in the tax code!
Leaving well enough alone
The vast majority of 401(k) owners leave their money in a former employer’s plan, largely due to inertia. Yet there are circumstances when you might be better off sticking with some of your old retirement accounts. For instance, they might offer lower fees than a new company’s plan or provide more or superior investment options. Maybe the old plan is performing nicely; consider leaving well enough alone. Economies of scale often support large company plans, which can have dirt-cheap annual expense charges, whereas smaller firms may charge around 1.5%.
Be careful mixing diverse types of plans. For example, blending pre- and after-tax accounts may generate messy tax complications. In other cases, mixing is not allowed at all. For example, a spouse’s IRA cannot be consolidated while both parties are still living. Nor can two IRAs inherited from different benefactors be mingled.
Want to get your ducks in a row? Start by locating any old accounts by contacting former employers. Check websites for a state’s unclaimed property or the Department of Labor to find who administered your old plan.
Talk to your tax adviser about whether it makes sense for you to consolidate any remaining retirement accounts.
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