How to consolidate retirement accounts

After a decade or more in the workforce, you may have changed jobs and opened 401(k) accounts with more than one employer. You also may have started a traditional and/or Roth IRA for additional retirement savings.

Consolidating these accounts has the potential to save you time and money—and make future financial planning easier. Read on to uncover the benefits of consolidating retirement accounts and explore a step-by-step guide to merging your accounts in a way that makes sense for you. 

Benefits of consolidating retirement accounts

It’s not necessarily a bad thing to have several retirement accounts, but it may make it hard to get a clear picture of your retirement savings. Here are the top benefits of consolidating your retirement accounts:

• Easier account management. If you’ve racked up several 401(k)s from jobs or have more than a couple IRAs, keeping track of them might be overwhelming. Combining accounts can simplify your finances and provide a clear picture of what you have saved.
• Cost savings on fees. Some retirement accounts come with administrative costs, like annual fees or charges for paper statements. While they may not seem like much, small fees like this can add up if your account balance is on the lower side. Combining smaller retirement accounts into one may help you lower your fees.
• Simplified estate planning. Consolidating your retirement accounts may streamline tasks for beneficiaries who need to handle your estate after your death.

Potential consequences of consolidating retirement accounts

Depending on the terms of your retirement accounts, you may encounter different outcomes for account closures or transfers. Be sure to read the fine print and understand any potential penalties ahead of time. These may include:

• Fees in moving accounts. Certain accounts may charge fees for transferring or closing accounts. And new investments may be subject to sales or asset management charges. However, consolidating your accounts can also cut down on unnecessary maintenance fees for those you’re no longer contributing to.
• Loss of account benefits. Some employer plans offer features such as hardship withdrawals, personal loan options, protection from creditors, penalty-free withdrawals at 55 if you separate from service or institutionally priced investment options. Consolidating may mean forfeiting benefits like these.
• Change in investment options. Combining accounts may mean losing out on the specific investment options of the accounts you’re closing. Working with a financial professional can help ensure you maintain a diversified portfolio as you consolidate.

5 steps to consolidating your retirement accounts

If you decide you’re ready to consolidate your retirement accounts, there are a few things that will help you stay on track toward achieving your financial goals. Here are five steps to start the process.

1. Find and track all your retirement savings accounts.

First, review your financial records to assess how many 401(k) and other retirement accounts you have, where they’re located, and their balances. Maybe you have one or more 401(k)s from multiple employers. Maybe you rolled over a 401(k) account from a previous job into a new 401(k) or a traditional IRA, or perhaps you cashed out instead.

If you find a retirement account you’ve forgotten, avoid treating it like an unexpected windfall, if possible. Cashing it out often comes with tax penalties (more details below).

2. Review your goals with a financial professional.

Once you have a handle on your accounts, it may be helpful to work with a financial professional who can review your overall financial goals and suggest which types of accounts best fit your situation.

To get started, collect the most recent statement from each retirement account, even if they’re a couple of quarters old. You can generally find quarterly statements online. From there, you and your financial professional can review each plan’s investment options, fees and maintenance.

3. Consider your 401(k) rollover options.

There’s more than one way to simplify your 401(k) retirement accounts. 

• Transfer funds into your new employer’s retirement plan (if allowed). You’ll be able to continue making contributions and manage the rolled-over money and new contributions together. Your earnings will be tax-deferred until withdrawal but subject to a tax penalty for early withdrawals before age 59½.
• Do a direct rollover of funds into an outside IRA. A direct 401(k) rollover is when funds are transferred directly from your workplace retirement plan to an IRA. Direct rollovers will not be taxed at the federal level, and earnings are tax-deferred until you withdraw them. Note that account fees may be higher than those of your employer-sponsored plan, and early withdrawals (before age 59½) are subject to a tax penalty.
• Do an indirect rollover of funds into an outside IRA. Less common than a direct rollover is an indirect rollover, where you withdraw funds from your workplace retirement plan and then deposit them into another tax-deferred retirement account. This might be an option if you left a job to start your own business, for example. Note that indirect rollovers may be subject to a 20% federal income tax withholding.
• Cash out your earnings. This option gives you immediate access to your money, but there will be a 20% federal income tax withholding. Your funds may also be subject to a 10% penalty for early withdrawal (if you’re younger than 59½), individual income taxes, and other state and local taxes.
• Leave funds in your former employer’s retirement plan. While this option allows your investment continued growth and earnings to remain tax-deferred until withdrawal, you won’t be able to make additional contributions. Plus, you’ll need to keep track of multiple 401(k) accounts.

The process of moving funds between accounts can vary based on the terms of each account. Working with a financial professional may help you more efficiently manage these details.

4. Review portfolio allocations.

When you first set up your 401(k) or other retirement account, you probably chose to allocate your contributions between several types of investments, such as stocks and bonds, based on the level of risk that seemed appropriate for your age, current situation and goals. If you’re consolidating accounts, this is also a good time to review investment allocations.

The further you are from retirement, the more exposure you may want to stocks, which tend to be more volatile than fixed-income investments but also tend to outperform them over a longer period. As you approach retirement, you can adjust your allocations, moving away from riskier equities and toward more stable, fixed-income holdings.

You may want to consider a type of mutual fund called a target date fund, which is a mix of investments based on your expected retirement year. Target date funds are broadly diversified and automatically adjust as your retirement year approaches.

A financial professional can help you rebalance your portfolio to suit your current age, retirement goals and risk tolerance.

5. Assess your total savings.

Once you have your retirement accounts under control, take a look at your overall savings. First, make sure you have three to six months’ worth of your household income set aside (and easily accessible) in an emergency fund. You don’t want a financial emergency to derail your retirement savings plan, and then potentially trigger a penalty and income taxes on the distribution. That’s why having a separate emergency fund is so crucial. 

Also, make sure you’re satisfied with the amount you’re saving for retirement. A general rule of thumb is saving 10% to 15% of your pre-tax salary each year. Finally, don’t forget to diversify your investment portfolio. Doing so can help you reduce risk, maximize your savings and potentially lower your taxes.

Setting yourself up for retirement success

Consolidating your retirement accounts can help you get a clearer picture of your financial situation and streamline the process of managing your money. But it’s not a set-it-and-forget-it task. After your retirement accounts are organized, be sure to review them at least annually.

Armed with a clear and streamlined picture of your savings, you can feel more confident about being on track for a financially healthy retirement. 

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Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses. All investment strategies have the potential for profit or loss. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. There are no assurances that a portfolio will match or outperform any particular benchmark.