Simplification, lower fees, and varied investment options make retirement account consolidation through IRAs an attractive option
Over the course of your work history, it’s possible to accumulate a number of different retirement savings vehicles. You may have some combination of 401(k), 403(b), 457(b) accounts or other retirement plans, as well as a traditional individual retirement account (IRA) and Roth IRA. Those who worked for themselves may also have a self-employed IRA. It’s also likely that all of these different vehicles are from different financial institutions, creating a complicated mix of accounts and companies to monitor.
If you’re coming up on retirement, consolidating all or part of these assets over into the right IRA can give you a streamlined source of retirement income that is easier to manage and track. You may gain more income options, such as annuities and systematic withdrawals. In addition, you may pay lower fees if your retirement savings is managed as one comprehensive plan by a single financial institution rather than paying fees on each account to a variety of different financial institutions. Consolidating your retirement funds in low-cost investments can help cut your investment costs, which can lead to additional money saved. For example, a $10,000 investment earning 6% annually over three decades incurring annual expenses of 1.5% will grow to $36,497 over that time period. However, if you cut those annual expenses to 0.5%, your investment will total $49,416—nearly $13,000 more than the higher-fee investment account.
Preparing for retirement is a good reason to look at consolidation. However, before taking action, it’s important to understand your options and make the right decisions for your financial situation.
When you consolidate, or “roll over,” one or more retirement accounts into an IRA, you move assets from your retirement plan to the IRA. Many types of retirement accounts, not just IRAs can be rolled over into an IRA with no maximum on the amount. This chart from the Internal Revenue Service explains which retirement plans can be rolled over into IRAs and other account types.
Some important rules and limitations apply to rollovers. For example, the assets withdrawn from the original retirement plan need to be moved to the IRA within 60 days from receipt of funds or those funds may be subject to taxes and penalties if you’re younger than age 59½--the age when you may first begin taking distributions.
The Internal Revenue Service (IRS) publishes a chart of other taxable rollover events and their exclusions here. If you are simply transferring an IRA or other retirement account from one financial institution to another, you may be able to use the trustee-to-trustee transfer method, which is not subject to many of the rules and potential restrictions as rollovers. Check with your financial institution to find out the best method for your situation.
Please note that there are often limits on making additional rollovers. Consult your financial advisor for more specifics on qualified distributions and limitations.
For some retirees, rolling all of your workplace assets into an IRA can create unintended consequences. In some plans you may no longer be considered a retiree of that institution and could lose access to retiree or state benefits such as healthcare and insurance. Also, some state tax benefits are conferred on qualified retirement plans, but not IRAs.
For those still working past age 70, a rollover from a workplace plan may trigger required minimum distributions. To be sure a rollover fits best with your plan confer with your plan administrator and advisor before starting the rollover process.
Once you understand the assets that can be rolled over and the rules that must be followed to minimize taxes and avoid penalties, the next step is to find the IRA solution that’s right for your situation, allowing you to maintain the tax-deferred status of your retirement investments while choosing from a wide range of assets in which to invest.
A common misconception among those saving for retirement is dividing your retirement savings among different financial firms is a way to diversify your investments. In reality, assets at various institutions could be invested similarly, offering little or no diversification. Also, it can be hard for you or your financial advisor to get a “big picture” view of your entire retirement portfolio.
When you consolidate your assets within a single financial institution, you can see by checking just one account how your assets are invested. The financial institution will typically offer you a range of assets in which you can invest and those allocations can be changed as your situation changes. Many IRAs allow you the flexibility to own a diverse selection of asset types, which is a good form of risk mitigation.
Different financial institutions offer different types of IRAs. Here are some common options.
You may also consider converting all or part of your rollover into a Roth IRA, which may deliver tax-free disbursements in retirement. Various IRAs also have different risk profiles, so you should understand your risk tolerance and how your portfolio should be balanced as you near retirement.
As with any important financial decision, it’s important to seek out a good financial advisor and a knowledgeable tax professional to help you understand the best options for your circumstances.
You’ve mastered the rules and, with the help of good financial and tax advisors, you’ve found the right IRA for you. The financial institution that holds your new IRA will provide you with the paperwork you need to initiate the transfer of funds.
Typically, the plan manager of your retirement plan will transfer the funds directly to the IRA administrator once you make the proper authorization. In some cases, you may receive a check payable to the IRA’s financial institution, which needs to be deposited there within 60 days to avoid possible taxes and penalties. If the check is made payable to you, the original retirement plan administrator must retain mandatory withholding of 20 percent of the account total, even if you intend to roll over the amount.
It is also not permissible to use distribution funds to purchase other assets, such as stocks, and transfer them to the IRA plan. In general, it’s best to transfer the funds directly to avoid withholding.
Timing is also important. If you’re preparing for retirement, give yourself adequate time to complete the rollover before you need to begin drawing down funds. It’s important to understand the rules and restrictions that could apply to some accounts such as inherited IRAs and Roth accounts, so be sure talk to your financial advisor to determine which accounts are best to consolidate, in light of the rules and your personal financial planning goals.
Consolidating multiple retirement accounts into an IRA offers you the opportunity to streamline your retirement planning, save money on fees, and defer taxation while still providing a variety of investment options. If you are nearing retirement and want a more focused approach to your multiple accounts, consult your financial advisor to determine if such consolidation is right for you.
1 Example assumes expenses withdrawn from the account at year-end, based on year-end assets. Please keep in mind that when comparing products, expenses are not always the determining factor. Features and benefits are equally important.
2 “Retirement Topics – Rollovers of Retirement Plan Distributions,” Internal Revenue Service. February 2013. http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics---Rollovers-of-Retirement-Plan-Distributions
Rollovers and transfers may be subject to differences in features, costs, and surrender charges. Indirect transfers may be subject to taxation and penalties. Consult your tax advisor regarding your situation.
Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, are not deposits, are not insured by any federal government agency, are not a condition to any banking service or activity, and may lose value.
TIAA-CREF Individual & Institutional Services, LLC, Teachers Personal Investors Services, Inc., and Nuveen Securities, LLC, Members FINRA and SIPC, distribute securities products.
TIAA-CREF or its affiliates do not provide tax advice. Please consult your tax advisor. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor.
There are benefits to an IRA rollover.