retirement accounts administration

How to Consolidate Retirement Accounts

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John E Chambers
August 27, 2021
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For retirees, getting their investments to yield maximally is a priority.

Retirement savings last longer when investments are well managed and structured.  But when there are several accounts, this could be more difficult. Consolidating your retirement accounts is an easy way to monitor and select your investments.

If you have more than one retirement account that you have built over the years, added to the 401(k) plans from previous employers, you may want to consider consolidating all of them to tidy up your savings and allow for better administration.

Apart from lowering your administrative fees, it also helps you concentrate on monitoring your investments from one source. Again your taxes would be simplified, and your finances would be better for it.

Consolidating multiple retirement accounts is done by simply transferring money from various accounts into one. It makes sense and has lots of advantages.

Eventually, combining your accounts will make your life easier. You will have fewer passwords to worry about, fewer emails to reply to, and less paperwork to handle. Getting all of this information sorted at the right time could be a lot of work. You can sort this out easily by consolidating your accounts.

Consolidating your accounts is not an easy, straightforward process either. However, the effort is worth it. Doing all the hard work necessary to relieve you for the rest of your life is a great bargain.

Reasons to Consolidate Retirement Accounts

manage accounts

In some cases, due to oversight errors, some people have completely lost track of some of their old retirement accounts.

These are some of the pitfalls of not consolidating your accounts. Reducing your accounts serves two significant purposes:

  1. Simplification – When you don’t have to manage lots of retirement account, you will be able to keep an eye on everything and also develop your investment plan
  2. Optimization – taking advantage of the best retirement account to consolidate your funds will allow you maximize the funds invested using the most suitable investment tool available to you.

One issue that drives consolidation, especially for retirees, is that one account, rather than multiple ones, makes it easier for beneficiaries to handle after the owner’s death.

The stress of tracking numerous accounts after the death of a loved one will be unwarranted if the accounts are consolidated.

There are, therefore, several advantages when you consolidate your retirement accounts. Let’s look at some of them.

More free time

At retirement, you shouldn’t be spending your waking hours attending to files and massive paperwork. When you consolidate your accounts, you’ll have all of your documents in one single location.

That creates more free time you can put to more productive use. With one single action, you can make necessary changes, such as adding a beneficiary or altering a piece of information. 

Contrary to what many people believe, maintaining one account does not negatively affect your funds

Cheaper to manage

manage your owna accounts

Managing your funds is also cheaper to handle when they are consolidated. If you know how much you have in all your investments, you can manage your funds better.

It helps you to control the risks better if you diversify your investments. To ensure your investments are well managed, it is better to have your funds in one location.

Considering that you may have to pay maintenance fees for your retirement accounts, consolidating the account reduces the fees you have to pay.

Help manage your overall returns

Your overall returns are a combination of all the returns you get from different investment sources. If you have various sources, you’re likely to have different rates of return to deal with periodically.

However, dealing with one account means all your rates of return are combined into one simplified statement that gives a clearer picture of the state of your earnings.

Update your account easily

When you have to make changes on your accounts, like altering an address or including a beneficiary, you can easily make these updates once and for all on your consolidated account.

When the accounts are separate, you will need to update the accounts separately. This process that could lead to more problems.

With just one phone call, your consolidated account is ready to be updated and your finances secured.

Consolidating your retirement accounts allows you to adjust your finances very quickly.

Things to Consider in Consolidating Multiple Retirement Accounts

how to consolidate accounts

There are certain things to consider if you want to consolidate your account because there are some pitfalls if not properly handled.

For example, you cannot combine pre-tax and after-tax accounts without having effects on your taxes. If you, therefore, add a 401(k) into your Roth IRA, it will increase your taxes. Therefore you must consider the implications of any rollover so that it is not counterproductive to your finances.

You should also consider these points before choosing to consolidate your accounts. While 401(K) limits your investment options, an IRA gives you unlimited investment choice.

You must also put creditor protection into consideration. It is generally known that employer plans offer better protection for your credit than IRAs. If you are seriously concerned about creditor protection, you may want to leave your funds in employer plans.

It should, however, be noted that there is a reasonable level of protection for IRAs, as regulatory authorities ensure strict compliance to laws. But generally, more security is available with employer plans.

For people that have a lot of retirement funds saved up, and they will like to keep it from creditors, it is important to explore several levels of protection that comes from various retirement accounts.

Many employer plans like 401(k)s gives incredible creditor protection. During bankruptcy as well, one might be able to protect up to $1.3 million in individual retirement account. There might, however, be some variation from one state to another in terms of the level of protection one can expect from the creditor.

For people with huge funds saved up for their retirement, the limited protection it offers is one of the reasons to get your facts right before converting to an IRA.

Also, another reason to let some of your funds remain in an employer account is that you have the opportunity to make use of your retirement savings before reaching the age of 60. There are no penalties for such withdrawals after the age of 55.

Such early withdrawal can help many people whose opportunity is not freely available in a consolidated account. Note that there is a mandatory 10% penalty which obtains when withdrawing early from an IRA.

How to Consolidate Retirement Accounts

protecting retirement accounts

Typically, employers allow former employees to keep retirement savings in their plans for as long as possible.

However, when you decide to consolidate, you can do it yourself. While a professional can help you consolidate your account, you can also do it yourself. Let’s consider how to go about it.

Moving a retirement account to a new employer plan or an IRA is referred to as a rollover, and when you roll over, your retirement savings are paid into your IRA directly. Note that if you are moving your employer plan money, 20 percent tax withholding will have to be deducted.

However, you can do a direct rollover which involves sending the funds from one plan to another without any withholding requirement.

If you want to consolidate your retirement accounts, please speak with your advisor. You’ll be guided on how best to avoid pitfalls and execute the best strategy.

Conclusion

From what has been highlighted so far, a rollover to IRA might appear like the only means of consolidation.

However, it is not. There are many options available. You can also roll over your assets into a new employer’s plan or keep them in an old employer’s plan.

What must be known is that any consolidation plan chosen has its pros and cons. You must be well versed with them so that you can take advantage of their benefits and, more importantly, not run foul of legal issues.

If you can consider the most critical issues, you should decide what would best suit your finances. Having a consolidated retirement savings account helps you manage your finances better and improves how to monitor your investments.

Reference:

John E Chambers

John E Chambers is an experienced financial advice expert. Born in Chicago, he has a master's in Industrial Finance, but he has spent decades offering investment advice to businesses and individuals alike. He is the founder of RetireeWorkforce.com and wants the website to be valuable for retirement advice. In addition, he writes articles that help users jump-start their retirement plans and choose the best investment options. If not pondering over stock market statistics or reading some magazines, you can find John spending time with his family. As an early retiree, John also offers unique insights into what post-retirement life is like.