Consolidating retirement accounts

Reasons to combine retirement accounts

You’ve been saving, investing, and diligently preparing for your future. As life unfolds with career changes and other events, you may find yourself with multiple retirement accounts held by different employers. If you’re looking to simplify the management of these accounts, consolidation might be the right move for a variety of reasons.

• Minimize fees — Consolidating accounts could save you money on fees. When you keep retirement accounts with former employers, they often charge administration fees for maintaining the account. And if you have accounts with multiple employers, fees can add up.
• Simplify account management — Monitoring, evaluating, and optimizing your investment strategy is easier when you have a consolidated view of your holdings. Fewer accounts also mean less effort in keeping account information updated every time you change addresses or phone numbers.
• Streamline required minimum distribution (RMD) calculations — Once you reach the age for taking required minimum distributions, your retirement plan administrator or the Individual Retirement Account trustee will calculate the distribution amounts (which change each year) for every qualified account you own. Consolidating these accounts will make it easier to track and manage distributions.
• Ease tax preparation — The various rules, requirements, and fees of each account will have to be monitored to make sure they’re correctly reported on your taxes.
• Simplify estate planning — Merging your accounts reduces the risk of overlooked assets and cuts down on paperwork during estate settlement, making it quicker and less stressful for executors and heirs. It also simplifies asset distribution, ensuring that your wishes are carried out smoothly, without unnecessary delays or legal complications.
• Potentially access more investment options — When you roll over a 401(k) into an IRA, you may have access to more investment options. 401(k)s typically offer a relatively short list of investment options, primarily mutual funds¹. By contrast, IRAs tend to offer a wider array of investment options. In addition to providing more choice in investment approaches, you may also find mutual funds and exchange-traded funds with lower fees in an IRA.

How to consolidate your retirement accounts

If you decide that combining accounts is the best way forward, the process can still be complicated. There are various laws that apply in different situations, and tax implications can vary, depending on how you structure the consolidation. Taking these steps can help make the process smooth and tax efficient:

• Create a comprehensive list — List all your retirement accounts along with the contact information of the plan administrators so you can gather the necessary transfer and consolidation forms.
• Collect recent statements — Gather your most recent statements for each account. They should be less than 90 days old to ensure accuracy when transferring balances.
• Understand the transfer, consolidation, and rollover rules — Consulting a financial professional during this process is highly recommended. They can help identify the best consolidation options and ensure that you're meeting all legal and financial requirements without incurring penalties.
• Understand the transfer procedures for both account custodians — In addition to the general rules laid out in the tax code, you’ll also need to navigate the procedures of both firms involved in the transfer. Some may allow a transfer to take place online while others may require you to call and request a check. In the latter case, you’ll want to make sure the check is filled out in such a way that the receiving firm can deposit it into your account. Read the rules carefully, and see if the receiving firm has a “concierge” or similar customer service representative who can assist in the transfer.
• Review transfer and exit fees — Some accounts may have exit fees or penalties for transferring funds. It's important to be aware of these potential costs up front to avoid any surprises.
• Reassess your portfolio — Consolidation is a perfect time to reassess your investment strategy. Consider adjusting asset allocations to match your current retirement timeline. You may also want to double-check your contributions to make sure they align with your long-term goals.

Types of transfers

When merging retirement accounts, it’s important to know the different ways you can consolidate them. A direct rollover involves transferring funds from one account directly to another. For example, you can move money from a former employer’s 401(k) to an IRA, or you can transfer the funds from one 401(k) to another. No distributions are taken, no money is withdrawn, and you will not have to pay any taxes or penalties. This is usually the preferred method, but it isn’t always possible.

An indirect rollover occurs when the funds from your 401(k) must be sent directly to you, perhaps in a check made in your name, so you can reinvest them in another plan. This type of rollover can be complex and have many tax implications, so it’s best to consult a professional financial advisor to help you navigate the process. For example, with an indirect transfer, you will usually have 60 days to reinvest the funds in another 401(k) plan. If you go beyond the 60 days allowed, the taxable portion of the distribution will be considered income, and you’ll owe taxes on it. You may also be subject to the 10% early withdrawal penalty if you are below age 59½. In addition, your former 401(k) plan may have to withhold 20% for federal income taxes. You’ll then have to make up the amount withheld out of your own funds to complete the tax-free rollover. If you don’t properly plan for this expense before you begin the rollover, you could be left in a tricky situation.

When you shouldn’t consolidate retirement accounts

While consolidation can make account management and retirement planning easier, there are instances where it may not be advisable or feasible. Here are some points to keep in mind.

• Additional fees — Each retirement account type has its own rules regarding withdrawals. Some institutions charge penalties for early withdrawals or account closures, which could offset any potential savings from consolidation.
• Better benefits and options — Some of your retirement plans may offer distinct advantages, asset allocations, and growth potential, or benefits like hardship loans and access to specific investment funds. Assessing these benefits can help you determine whether keeping separate accounts is more advantageous than consolidating.
• Varying account types — While you can combine accounts, like rolling over a 401(k) from a previous employer into another 401(k) or an IRA, mixing pre-tax- and after-tax-funded accounts can result in tax liabilities. It’s also important to note that spouses cannot combine IRA accounts. Each person must maintain their own IRA.

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¹Before you decide to roll over the proceeds of your retirement plan to an IRA or annuity, you should consider whether you would benefit from other possible options such as leaving the funds in your current plan or transferring them into a new employer's plan. You should consult with each employer's Human Resources Department to learn about important plan features and rules. You should be sure to compare the fees and expenses of each plan and investment option to those of any other investments that they are considering. You should review plan documents and the IRA agreement, as well as the prospectuses for plan investment options and any other investments that you are considering. Neither New York Life nor its representatives or affiliates provide tax or legal advice. You should consult with a tax or legal advisor to discuss any questions or concerns that you have, such as the tax consequences of withdrawing funds or removing shares of an employer's stock from a retirement plan and whether money invested in a retirement plan receives greater protection from creditors and legal judgments in their state than money invested in an IRA or annuity. You should also consider that you may be able to take taxable, but penalty-free withdrawals from an employer-sponsored retirement plan between the ages of 55 and 59.5 that you would not be able to take if they invest in an IRA or annuity. Additionally, if you plan to work after reaching age 70.5, you may not be required to take minimum distributions from your current employer's retirement plan but would be required to do so for funds invested in an IRA or annuity.