As people switch jobs, change financial planners, or just move through life, it’s not uncommon to leave a trail of IRA accounts, 401k accounts, and 403b accounts. Why not take this opportunity to clean up these retirement accounts by consolidating them into one or two accounts?
Consolidating all of your retirement accounts into just a few accounts makes a lot of sense for many reasons, including:
• The fewer the number of accounts, the easier it is to manage your investment portfolio. There are recommended asset allocations based on your age, financial goals, and risk tolerance available on most financial websites. Plus, make sure to either periodically rebalance your investment portfolio on your own, or seek the assistance of a financial professional to help maintain the recommended asset allocation for your portfolio.
• You also generally have the opportunity to borrow half of the balance in your 401k or 403b account, up to $50k. This can include a Solo 401k as well. Please note, however, that you can only take out a loan from the account at your current employer based on that employer’s rules. For that reason, rolling old 401k and 403b money into your active 401k or 403 account could give you tax-free access to more of your retirement money in case of a financial hardship or to use as the down payment on a home. You can also usually roll IRAs into a 401k or 403b account too thanks to one of the Bush Tax Acts. (Please note that if you leave your current job and have not paid off the full amount borrowed, the remaining outstanding balance will be treated as a taxable distribution subject to federal income taxes, state income taxes, and depending on your age, a 10% early withdrawal penalty as well.)
Consolidating your accounts should actually be quite easy. Since one goal of every financial institution and investment advisor is to hold and/or manage as much in assets as possible, and they all love slow moving retirement assets, they should be extremely helpful as you complete the necessary paperwork to initiate and complete these rollovers.
Caveat converter. Anyone who contributes to a Traditional IRA each year, and then converts that IRA to a Roth IRA, probably does NOT want to roll their 401k and 403b accounts into an IRA. The way the formula works that determines how much of a Roth Conversion is taxable, the more money you have in IRAs, the higher the percentage of the conversion that is taxable. IRA assets include Traditional IRAs, Rollover IRAs, SEP IRAs, and SIMPLE IRAs.
Why not also take this opportunity to rebalance your entire investment portfolio as part of the spring clean up? Consider putting less tax-efficient investments in your tax-advantaged accounts while keeping index funds, ETFs, non-dividend paying stocks, and tax-exempt bonds and bond funds in your taxable accounts.
And while you’re at it, why not take this opportunity to review who is listed as a beneficiary on your retirement and insurance accounts too? No matter what your will says, the person who will receive money held in your retirement or insurance accounts when you die is the person listed as the beneficiary on that account on the day you die. If you got married, divorced, re-married, had kids, have kids getting married, reached the point where your kids are having kids, or other circumstances to your family life, did you update the beneficiaries listed on each retirement and insurance account to direct those assets to the proper person or charity upon your death?