Five Things to Consider Before Consolidating Retirement Accounts Burley ID
Buffington Mohr McNeal
Dillon Financial Planning
Rabbanian Financial Planning, Inc.
Some people have retirement funds in too many accounts. In part, this is a function of a mobile workforce in which workers change jobs every few years. Another cause is the complicated U.S. tax code, which has offered savings incentives for accounts with different qualifications and characteristics through the years.
As a result, many people have retirement nest-eggs spread among 401(k)s and individual retirement accounts (IRAs) in a number of financial and sponsoring institutions, making it difficult to track portfolio performance, asset allocation, and diversification. Keeping money in all those accounts also can be costly, as some accounts charge annual fees of $100 or more.
Consolidating your retirement money into as few accounts as possible is an admirable goal. As is often true with taxes, though, it’s not easy to accomplish unless you know the rules. Here are some things you need to know about before proceeding.
1: Not All Accounts Can Be Combined
Most – but not all – retirement funds can be accumulated into an IRA account. The exception is that accounts funded with after-tax dollars, such as Roth IRAs and Roth 401(k)s, cannot be consolidated into tax-deferred accounts, such as employer-sponsored plans and traditional IRAs.
Although holdings in employer-sponsored plans (including 401(k)s, SEP-IRAs and SIMPLE IRAs) can be rolled over into traditional IRAs, the opposite generally is not true. David M. Williams, CFP®, a Memphis-based business consultant and investment adviser with Wealth Strategies Group, advised that 401(k)s can be funded only with money and assets from other 401(k)s and employer-sponsored plans. Although the tax laws allow employers to set up separate “IRA accounts” inside their qualified plans, most do not offer this feature because “IRA funds cannot be commingled with qualified money within the plan, which increases administrative duties,” Williams said.
Employees who need to take their money out of an employer’s plan before they have an account in another qualified plan can use a “conduit IRA” to park the money or assets temporarily. These accounts are used frequently by people who are between jobs or who have not yet become eligible for their new employers’ retirement plans. Holdings in a conduit IRA can be rolled over into a 401(k) as long as they are not comingled with holdings that don’t come from a qualified employer plan.
2: 401(k)s and IRAs Are Different
When choosing between a 401(k) and an IRA for your consolidation account, there are advantages and disadvantages to each. Generally, 401(k) plans can give account holders better access to their money, while IRAs opened with large financial institutions tend to offer a wider array of investment options. If you need to preserve your future ability to take a loan from your retirement assets, you should consolidate into a 401(k) because you can’t take lo...