Maintaining a number of retirement accounts may incur unnecessary fees and make it difficult to track performance. Consolidating your accounts may be the answer.
By the time many of us reach our 40s and 50s, we’ve accumulated a slew of retirement accounts: A traditional IRA here, a rollover IRA there, and two or three scattered 401(k) accounts left in the plans of former employers.
As the accounts add up, it becomes extremely difficult to get a clear picture of your overall retirement preparedness.
According to a Bureau of Labor Statistics report, the average baby boomer will hold more than twelve jobs in their lifetime. Each new job change may mean a retirement account left behind and a new one opened.
If this sounds familiar, you may benefit from consolidating your retirement accounts into one central account. Consolidating accounts can help you make sure your savings are invested appropriately for your overall goals, track the performance of your holdings and, in some cases, discover more investment choices and incur lower fees.
Streamlining the account structure of your retirement savings has many potential benefits:
Over time, your investment objectives and risk tolerance may have changed. Thus, it can be difficult to maintain an effective retirement investment strategy—one that accurately reflects your current goals, timing and risk tolerance—when your savings are spread over multiple accounts. Once you begin the consolidation process, you can strategize potential investment options to match your current goals and objectives.
Often, 401(k) plans, other employer-sponsored retirement programs and even some IRAs have limited investment menus. Some IRAs may offer greater control, more options or expanded diversification when compared to employer plans and other IRAs, but on the other hand they might not offer the same options. Whether a particular IRA’s options are attractive will depend, in part, on how satisfied you are with the options offered by your former or new employer’s plan.1
It is easier to monitor your progress and investment results when all your retirement savings are in one place. By consolidating your accounts, you will receive one statement instead of several—which will cut down on endless amounts of monthly statements from multiple plans.
Some employer plans also provide access to investment advice, planning tools, telephone help lines, educational materials and workshops. Similarly, IRA providers including Morgan Stanley offer different levels of service, which may include full brokerage service, investment advice and distribution planning.
Reducing the number of accounts may impact account fees and other investment charges. Generally speaking, both employer-sponsored qualified plans and IRAs have plan or account fees. Although fees associated with an IRA may be higher than those associated with an employer plan, consolidating multiple IRAs may reduce your overall expenses.
Generally IRA owners can take distributions penalty tax-free once they attain age 59 ½. Qualified plan participants between the ages of 55 and 59 ½, once separated from service, may be able to take penalty tax-free withdrawals from the qualified plan.
Once you reach age 70 ½, having fewer retirement accounts to manage can mean having fewer RMD requirements to follow.
If your employer-sponsored retirement plan is terminated or abandoned (an “orphan plan”) or is merged with or transferred to a retirement plan of another corporation after you leave, it may be difficult to locate the plan administrator to request a distribution of your benefits or to change investments. By contrast, assets in an IRA are always accessible if you want to change your investment strategy or need to take a distribution.
There are of course, some situations where you may not want to consolidate. For example, while many qualified plans allow for loans, you cannot take a loan from an IRA. Assuming your qualified plan allows a loan once you’ve left the company (a very rare occurrence), it’s worth noting you will not be able to take out a loan once you roll over a qualified plan into an IRA.
Another situation is RMDs (required minimum distributions). Upon reaching age 70½, owners of a traditional IRA must begin taking required minimum distributions or face stiff IRS excise tax penalties. If the plan permits, qualified plan participants can delay taking required minimum distributions after attaining age 70 ½ if they are still working for the employer that sponsors the plan.
The case for consolidating your accounts only grows more compelling with time. By simplifying your retirement account structure, you can have a clearer picture of your financial plan and potentially expand your investment choices. A Morgan Stanley Financial Advisor or Private Wealth Advisor can help you get started whether your retirement is years away or just around the corner.