Consolidating Retirement Accounts [Video]

by Michelle Smalenberger, CFP® / March 1, 2022

Do you have accounts with past employers you need to do something with?  Should you roll these over or should you just leave it where it’s at?  We will discuss some things to consider when you are making these decisions.  I’ve drawn a chart here so we can answer some questions about Consolidating Retirement Accounts. There are really two main types of accounts available with your employers: tax-deferred like a 401(k) and tax-free, like a Roth 401(k).

What to consider when Consolidating Retirement Accounts:

  1. Investment Options:  When we talk about investment options these are the choices you can invest your funds in.  These are typically going to be limited to a list that your employer has made available to you.  Some allow for a self-directed brokerage account where you can choose from any investment, but for the most part you are limited to a number of choices given to you.  Now in an IRA there are unlimited choices and the account can be held at any custodian.  The Roth 401(k) is the same regarding investment choices.  You can see quickly just from this first consideration why it’s important to research these factors when consolidating retirement accounts.  
  1. Access to Funds:  At some point you will need to start using the funds you’ve saved.  What is the process to do that?  From your 401(k) you need to contact your plan administrator or old employer.  Then you will likely need to complete paperwork or link your account to your bank account.  Every employer is different so you will have to inquire about the process you need to abide by.  Accessing funds from an IRA can be set up easily by linking direct to your bank account.  Again, the Roth 401(k) is similar  in this area.  You just need to understand that the process to access funds does not need to be overly complicated.  There are custodians that make it simple. 
  1. Fees:  This is one of the more important things that people aren’t aware of.  With each of these accounts fees will vary.  You can research to see the fees charged for each fund.  They will be different depending on the investments available to you.  But we are specifically talking about the expense ratio of a fund.  You need to understand the total fees you are being charged so you can compare options equally.  Very often an investment professional can cost you less by choosing lower cost funds.  And you receive more value because they provide financial and tax planning in addition. This is important to know so you can choose the professional advice you receive.  
  1. Required Minimum Distributions (RMDs):  This is one of the biggest differences between these accounts.  Required Minimum Distributions are required from an IRA and from a 401(k) when you stop working.  These start at varying ages between 70 ½ and 72 depending on when your date of birth is.  Even a Roth 401(k) requires an RMD if you are no longer working.  Now remember with a Roth type of account you won’t pay tax but you do have to take a certain percentage out each year.  But if you roll your Roth 401(k) over to a Roth IRA then there is not a RMD required.  This is the biggest item in this list where there are differences between the accounts.  

What to watch out for when consolidating retirement accounts

So now let’s consider where we can move these accounts to.  To move funds out of the current retirement account you typically want to complete a “rollover.”  To avoid a taxable event the 401(k) gets rolled over to an IRA.  This rollover does not cause any taxes to be paid.  Likewise, a Roth 401(k) gets rolled into a Roth IRA.   

Another catch you need to be aware of is a direct vs indirect rollover.  This has to do with where the check will be sent to complete the rollover.  When you are rolling funds over you are literally removing them from your 401(k) and sending the funds to your IRA.  Ideally you want it to go directly from your employers account to your IRA.  It is not uncommon that they mail the check directly to you, which is known as an indirect rollover.  It indirectly goes through you, to your IRA.  If this is your employer’s process you need to make sure that check gets deposited into your IRA that you have opened in a timely manner.  

The important 60 calendar days you can’t pass

Something that is really important is the 60-day rule.  These are 60 calendar days, NOT business days.  You have 60 calendar days to get those funds from when they were sent to you into your IRA account.  If you pass the 60-day window all of the funds will be taxable.  This can be a very large amount given some people’s retirement account balances.

If we can help you to think through all of these choices or the timing we would be happy to.  We specialize in managing the many decisions so you take action properly and completely.  Even managing when to start taking distributions can become complex.  We will help make it simple for you. 

Ready to take the next step?

Schedule a quick call with our financial advisors.

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Michelle Smalenberger, CFP®

I have a passion for helping others develop a path to financial success! Through different lenses on your financial picture, I want to help create solutions with you that are thoughtful of today and the future. I have seen in my life the power of having a financial plan while making slight changes of direction from time to time. I believe you can experience freedom from anxiety and even excitement when you know your finances are on track.