Too Many Retirement Accounts? How to Get Organized
Essential 401(k) housekeeping before you retire
If you’re approaching retirement, chances are you’ve had more than a few job changes. A government report tracking Baby Boomers (born 1957 to 1964) estimates they hopped jobs an average of 12 times before hitting their mid 50s.
Even if you changed jobs half as much, you likely have a few 401(k) accounts you left behind. Research from Capitalize estimates there are more than 24 million orphaned 401(k) accounts, with an average balance of $55,000. In aggregate, it estimates there’s nearly $1.35 trillion parked in accounts at former employers.
Perhaps you left a 401(k) behind out of benign neglect. Life was busy and you knew it was money that would stay invested for your retirement, so you didn’t think much about it. Or perhaps you made a conscious decision that you wanted to leave the money behind because you thought the plan was solid.
Whatever your reasons, as retirement nears you should think about moving your straggler 401(k)s under one roof. It’s going to make things a whole lot easier once you start to take money from the accounts.
Consolidating your 401(k)s
Once you leave a job, for any reason, you are allowed to move your 401(k) account to another retirement account. This is called a 401(k) rollover.
If you have multiple 401(k)s, you can roll over each one into an individual retirement account you have at a brokerage, such as Fidelity, Schwab, TD Ameritrade and Vanguard. (If you don’t have an account, the firms are eager to get you set up.)
Simplifying your financial life in retirement
For starters, it’s easier to make sure you have the right mix of stocks and bonds when all the accounts are in one place. Every time you log into an online account, you can get a quick, free pie chart based on your current mix. There’s also plenty of advice (some free, some premium) on how to build the right mix for your next stage: living in retirement.
At age 72, you must start to take withdrawals from your retirement accounts. (You can start earlier. Age 72 is just when the government insists on annual required minimum distributions, or RMDs). Having to coordinate RMDs from multiple 401(k)s can be a hassle. Under one roof, it’s a breeze.
An odd quirk of federal law is that you must take an RMD from each 401(k) you own. But if you have multiple IRA accounts, you have the option to add up all the RMDs you owe across all your accounts and then take the money from just one IRA.
Rollovers can save you money
Unless your entire career was spent hopping from one Fortune 500 company to another, it’s likely your old 401(k)s are costing you too much.
A 401(k) from a smaller employer typically offers mutual funds with annual expense ratios that are more than what you would pay if you rolled the money into an IRA at a brokerage.
Expense ratios are an annual fee a fund or exchange traded fund (ETF) charges.
All the big discount brokerages offer low-cost index mutual funds and ETFs with very low expense ratios below 0.10% or so. The funds offered in smaller workplace plans can charge expense ratios of 0.50% to 1.00% or more. That difference may seem like small potatoes, but low-cost investing can add thousands of dollars to your retirement stash over time.
How to roll over
Once you have an account at a discount brokerage, you will easily find links to how to roll over money from an old 401(k) into an IRA at that brokerage. And rest assured there are also humans ready to help if you have questions. They are hungry for your business.
The most important step is to choose a direct rollover, which sometimes is referred to as a trustee-to-trustee rollover.
What this means is that you sign paperwork that enables the 401(k) administrator to send the money directly to the brokerage, and the brokerage then immediately plunks the money in your IRA. (You will need to choose how the money is invested in the IRA.)
Not only is this the easiest way to move retirement money, but it is also the best way to ensure you will owe no tax on the money you move.
If you instead opt to have the 401(k) send you a check (or direct deposit) for your account balance, you have just 60 days to get it reinvested in an IRA. Miss that deadline and the entire amount will be considered a withdrawal, and you will owe income tax on every dollar. Moreover, if you are younger than 55, you will also owe a 10% early withdrawal penalty.
When leaving money in a 401(k) makes sense
As noted earlier, if the expense ratios charged by funds inside a 401(k) are very low, it can make sense to leave the money where it is. And if you like the menu of investment options and services offered, that can be a reason to stick with a 401(k).
You might also want to check if any of your 401(k)s offer a stable value fund as one of the investment options. These are conservative options that are available in 401(k)s, but not IRAs. As its name implies, the goal is for the value of the investment to not go down. Yet they often offer income yields that are much higher than cash or an ultra-short-term bond fund. If you have access to a stable value fund, you might want to keep that 401(k) to serve as a chunk of your “safe” money in retirement.
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