Dos And Don'ts For Consolidating Your Retirement Accounts

Chances are, you'll change jobs about 12 times during your career. That's what the Bureau of Labor Statistics says.

And that means the odds are good that you'll end up owning several retirement accounts, including 401(k) accounts and IRAs.

One key downside is that having different pots of money sitting in a variety of accounts can make it harder to do retirement planning and to update your plans.

It can also be a hassle to access your accounts and tweak your portfolios, especially with accounts sitting in workplaces where you hardly know anyone any more -- or where you may not enjoy speaking with people. And how can you keep track of how close you are to building a nest egg big enough for retirement ?

So which accounts should you leave in place? Which should you consolidate?

Bryan Slovon, founder and CEO of Stuart Financial Group, in Annapolis and Greenbelt, Md., offers these dos and don'ts for various types of retirement accounts:

  • 401(k) accounts: If your current workplace's plan allows it, you can roll over assets from 401(k) accounts at prior jobs into the current one. Ask your plan administrator or HR office if you have that option. That sort of consolidation can make it more convenient for you to rebalance your overall portfolio and to stick to your target asset allocations. But should you do it? Fees on your old account might be lower than those in your current plan. Or you might have more investment choices -- or better ones -- in your old account. If you dislike the current plan enough, remember that you always have the option of rolling the old account's assets into an IRA.

"One more important reason for older clients" -- anyone older than age 70-1/2 -- "who are still working to consolidate 401(k) accounts is that you can avoid having to take required minimum distributions (RMDs) for that year," Slovon said.

You might want to avoid RMDs for several reasons. For one, they deplete an account (although you can always reinvest the money). Also, withdrawals from a regular 401(k) account are taxable. And withdrawals can boost you into a higher tax bracket. For those reasons, account holders who do not need the money to pay living expenses often prefer to leave the money inside an account.

  • Roth IRAs: One major no-no is mixing money in a Roth IRA with money in a traditional IRA or 401(k). That's because you paid tax on any money that you've contributed to a Roth account. As a result, after five years and once you reach age 59-1/2, you can withdraw earnings on that money tax-free. (You can withdraw contributions at any time tax-free.) Not so with non-Roth accounts. Both earnings and contributions are taxable as ordinary income once you withdraw them. Mixing the two creates major tax headaches.

So there's virtually no reason ever to shift money from a Roth into a traditional retirement account. Yet you might want to consider switching money from a traditional IRA or 401(k) into a Roth -- but only under certain conditions.

The downside is that you'll pay tax on the pretax money that you convert -- that is, on contributions to a traditional IRA on which you got a tax deduction and any investment earnings that followed. But once you put the money into a Roth IRA, all distributions will be untaxed after five years and age 59-1/2.

So which is better -- a Roth or a regular account ? You come out ahead on an after-tax basis -- the only basis that matters -- with a Roth if you are young and expect your tax bracket to be higher when you retire. That gives your money time to compound tax-free.

  • Traditional IRAs: The advice is simple and reflects what we said above about Roth IRAs. Don't mix traditional and Roth IRAs.

  • Nondeductible IRAs: It's OK to mix Roth IRA money or other assets with nondeductible IRA assets because they follow the same tax rules. But you should not mix assets in a traditional IRA with assets in a nondeductible. "You'd be creating an accounting nightmare and likely tax problems," Slovon said. "It will cost you a lot in time and aggravation, and there's no benefit."

"Consolidation of any accounts boils down to making it easier to coordinate your portfolio moves and do your asset allocating," Slovon said. "The less your assets are spread around, the easier it is to keep track of them and assess what you've got. It's like the old saying about having too many chefs in the kitchen. It makes it more likely they're going to be tripping over each other, adding too much salt. You're not going to like the way the soup turns out."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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