At first glance, combining your retirement accounts makes perfect sense. You would reduce associated fees by paying them only on one account rather than several. It is also simpler and more practicable to manage a single account. Consolidating your accounts may be the best choice for you, but there are a number of factors you will need to consider before you can be sure. Before you move your retirement funds, speak with a retirement planning professional to make sure you are making the most informed decisions possible. Here are some of the topics you should cover:
Will combining my funds result in lost tax benefits?
If your employer’s plan includes stock, you may lose some tax benefits by rolling the stock portion into an IRA.
Additionally, if one or more of your accounts include qualified-plan balances that accrued prior to 1974, or if you were born before 1936, consolidating funds into other plans may cause you to lose the benefit of lower tax rates to which you would otherwise be entitled. Consult with a qualified financial planner for specific advice on minimizing taxes on your retirement funds.
How might combining accounts limit access to my funds?
Different types of retirement plans have different rules about when and for what purposes funds may be withdrawn without penalty. Be aware that moving your money can limit your ability to access it. Carefully consider when and why you may need to withdraw funds early before you move them to a different plan.
If you think you may retire between the ages of 55 and 59 ½, for example, you may want to keep money in your employer’s plan. You can make withdrawals from most employer plans when you leave your job at or after age 55. If you move the money to an IRA, you would generally not be able to withdraw from that account without penalty until age 59 ½.
On the other hand, if you think you may want to use some of your retirement money to purchase a home or to cover education costs, you will want those funds in an IRA, which allows for penalty-free withdrawals for those purposes. 401(k)s carry no such provision. Always consider carefully all ramifications before withdrawing money from your retirement account for present use. Speak with a retirement planning professional to get information on what kind of impact your proposed withdrawal is likely to have on your future income and its sufficiency to meet your anticipated needs.
Also, consider the likelihood that you will want to take a loan from your retirement account. Although your employer plan may allow this, an IRA will not.
Which plan best suits my investment needs?
Since your future livelihood depends on the success of your retirement portfolio, how the money is invested is critically important. Generally speaking, an IRA allows more investment choices than a 401(k). Get the advice of a professional retirement planner to determine how your money would be best invested, considering your individual means, needs, and goals.
The retirement planning professionals at Boelman Shaw are ready to discuss your retirement plan options. Contact our Des Moines office to discuss whether retirement account consolidation is the best choice for you.
Tax and accounting services provided through Boelman Shaw & Company, LLC. Advisory services provided through BSC Capital Partners, LLC a state of Iowa registered investment advisor.