Are multiple retirement accounts giving you a cloudy picture of your performance and zapping you with unnecessary fees?
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:
Comprehensive investment strategy.
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.
Potentially greater investment flexibility.
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.
It is easier to monitor your progress and investment results when all your retirement assets are in one place. By consolidating your accounts, you will receive one statement instead of several. That simplifies your life while protecting the environment.
Customized service levels.
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 and investment-related expenses. However, in some cases, employer-sponsored qualified plans may offer lower cost institutional funds, and in some cases may pay for some or all of a plan’s administrative expenses. Generally, fees associated with an IRA will likely be higher than those associated with a plan, but consolidating multiple IRAs may reduce your overall expenses.
Penalty tax-free withdrawals.
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.
Help simplify your required minimum distribution (RMD) obligation.
Upon reaching age 70½, owners of a traditional IRA must begin taking required minimum distributions (RMDs) or face stiff IRS excise tax penalties. Having fewer retirement accounts to manage can mean having fewer RMD requirements to follow.
However, you should also note that if the plan permits, qualified plan participants can generally delay taking required minimum distributions after attaining age 70 ½, if they are still working for the employer that sponsors the plan and do not own more than 5% of the plan sponsor.
Comprehensive knowledge of your assets.
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. Thus, once you roll over a qualified plan into an IRA, the ability to take a loan is no longer available. However, once you leave the company sponsoring the employer plan, you may not be able to take a loan out anyway, since few qualified plans allow loans to be taken out by former employees.
Important Things to Consider
Typically, as a retirement plan participant who may be receiving an eligible rollover distribution from the plan, you have the following four options (and you may be able to engage in a combination of these options depending on your employment status, age and the availability of the particular option):
- Cash out the benefits and take a lump sum distribution from the current plan subject to mandatory 20% federal income tax withholding, as well as income taxes and the 10% early withdrawal penalty tax, OR continue tax deferred growth potential by doing one of the following:
- Leave the assets in your former employer’s plan (if permitted),
- Roll over the retirement assets into your new employer’s qualified plan, if one is available and rollovers are permitted, or
- Roll over the retirement assets into a traditional IRA
Each option offers advantages and disadvantages, depending on your particular facts and circumstances (including your financial needs and your particular goals and objectives). Some of the factors you should consider when making a rollover decision include (among other things) the differences in: (1) investment options, (2) fees and expenses, (3) services, (4) penalty tax-free withdrawals, (5) creditor protection in bankruptcy and from legal judgments, (6) Required Minimum Distributions or “RMDs”, (7) the tax treatment of employer stock if you hold such in your current plan, and (8) borrowing privileges.
The Case for Consolidation Can be Compelling
By simplifying your retirement account structure, you can have a clearer view of your financial picture and potentially expand your investment choices.
Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice and are not “fiduciaries” (under the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise provided in a written agreement with Morgan Stanley and/or as described at www.morganstanley.com/disclosures/dol. Individuals are encouraged to consult their tax and legal advisors regarding any potential tax and related consequences of any investments made under an IRA.
By law, some IRAs may not be consolidated. Clients should consult their personal legal advisor.
Consolidating accounts into a single IRA may not be right for everyone. There may be a number of options available to you. Each option offers advantages and disadvantages, depending on your particular facts and circumstances (including your financial needs and particular goals and objectives). The decision of what option to select is a complicated one and must take into consideration your total financial picture. To reach an informed decision, you should carefully consider the alternatives, the related tax and legal implications, fees and expenses, and the differences in services, and discuss the matter with your own independent legal and tax advisors.
This article does not address state and local income taxes. The state and local income tax treatment of your retirement account, as well as the contributions to it and the distributions from it may vary based on your state of residence. You should consult with and rely on your own independent tax advisor with respect to such.
This material does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this material may not be suitable for all investors. Morgan Stanley Smith Barney LLC recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.
Diversification does not assure a profit or protect against loss in declining financial markets.
© 2018 Morgan Stanley Smith Barney LLC. Member SIPC.
CRC 2129201 (06/2018)