Make Retirement Savings Easy: Consolidate Accounts to Increase Convenience, Reduce Risk

An old adage says that you should never put all your eggs in one basket. Although this may be good advice most of the time, having only one basket may make sense when it comes to the retirement accounts for you and your spouse. Consolidating multiple retirement accounts into one or two offers several benefits, such as convenience, reduced risk and fewer fees.

Increased Convenience and Reduced Risk are Reasons to Consolidate

Perhaps the most important benefit of consolidating accounts is that it can reduce your investment risk. Many investors mistakenly believe that splitting their money among several accounts is safer. In fact, it’s riskier because ensuring you have properly allocated investments among multiple accounts is difficult.
When considering risk, you must take into account market risk (how well your investments will perform) as well as purchasing power risk (your investments’ growth rate compared with the rate of inflation and cost-of-living increases).
Tracking and analyzing investments in several retirement funds can be daunting and time-consuming. Nevertheless, it’s critical. Often older accounts are left basically unattended, even though they may be in investments that are no longer appropriate. For example, a 401(k) still sitting with your first employer whom you haven’t worked for in 20 years may be invested too aggressively.
Ensure you can easily monitor your investments by consolidating the various accounts. Instead of receiving statements from multiple sources, you’ll get all your information on one or two statements.
By getting rid of extraneous retirement accounts, you will also eliminate any fees associated with them, saving yourself possibly hundreds of dollars annually. With a large enough consolidated account balance, your plan manager may waive fees on remaining accounts.

Types of Accounts to Consolidate

When deciding which types of retirement vehicles to roll your other retirement accounts into, keep in mind that you generally need only one or two. If you are participating in your employer’s retirement program, continue to do so — especially if your company matches your contributions. You usually shouldn’t consolidate all accounts into your company’s plan because it limits your investment options to whatever your employer has selected.
In most cases, you’ll want to consolidate your retirement accounts into a traditional or Roth IRA. Allowing you to split your funds among a wider variety of vehicles, such as stocks, bonds, mutual funds and annuities, handpicked to help you achieve your goals.
If you plan to borrow against your retirement funds, consider rolling over extraneous accounts into your employer’s plan instead. For example, you may be able to borrow against your 401(k) plan to put a down payment on a new home. This isn’t possible with an IRA, but in certain circumstances, you can make penalty-free withdrawals from an IRA before age 59-1/2. For instance, you may withdraw up to $10,000 penalty-free for a down payment on a first-time home purchase. Remember that, even though the penalty is waived, you’ll owe income tax on the withdrawal amount.

Consolidating Accounts is a Simpler Way

Saving and protecting your nest egg for you and your spouse can be difficult enough. Why not simplify the tracking and analysis of the various accounts by consolidating them into one or two retirement vehicles? You’ll likely be glad you did.
IMPORTANT NOTE: Beware of the Tax Bite, Tax Penalties and Other Fees When Consolidating Accounts
When you consolidate your retirement accounts, you must ensure that the money is rolled over directly into the new account, rather than sent to you to reinvest in a new account. Failing to roll over the funds properly could result in significant taxes and a tax penalty.
If the money does go directly to you, your plan manager generally must withhold 20% of the funds in your account as a tax on the income. To avoid any tax, you will need to deposit 100% of the funds in your new account within 60 days of the withdrawal and replace the money that was withheld for the tax. You can then claim the amount withheld on your income tax return, in much the same way as you would claim withholding from your salary.
What if you don’t roll over the funds into the new account within the 60-day limit? The lump-sum payment you receive will be taxed at your current income tax rate. The 20% your plan manager withholds will be applied toward this total. Also, if you receive the money before turning age 59-1/2, you’ll likely owe a 10% early withdrawal penalty.
In addition to possibly accruing taxes and tax penalties when rolling over accounts, you also may incur other fees, the size and type of which depend on the:
  • Account type the money is coming from;
  • Policies of the organization managing your plan; and
  • Type of transaction you’re conducting.
If the rollover requires stock liquidation, you could incur brokerage fees. If you conduct an in-kind stock transfer instead, you may incur a different sort of charge or no charge at all.