If you've changed jobs several times during your working years, you might have old retirement accounts scattered among various employers. Keeping track of those assets can be overwhelming and time-consuming, and you might also leave challenges for heirs if you pass away with old accounts that are hard to find.
Fortunately, you have options, and in some cases, it's wise to combine 401(k) accounts from previous employers. Doing so may help simplify your life, and there might be financial benefits as well.
For example, one option is to use an IRA to consolidate accounts from former employers. That single account can accept rollovers or transfers from other retirement accounts, enabling you to manage everything more easily.
While the process is generally straightforward, reviewing your plans with a tax expert before moving accounts is critical. Ask about any potential tax consequences, and get tips on how to handle the logistics to avoid problems with the IRS.
Potential Benefits of Combining Accounts
What exactly do you gain when you combine 401(k) accounts? You'll have less to keep track of, including passwords and statements from old retirement plan providers. As a result, you're more likely to actually monitor your holdings.
When it comes to investment options, you can familiarize yourself with just one set of investments or one financial advisor instead of figuring out what's available in each account. It can be tedious to build a custom portfolio when each employer offers a different menu of investments. It can also be faster and easier to take distributions after leaving a 401(k) plan.
More Investment Options
You might also have access to more investment options. A typical 401(k) plan might offer 15 to 30 standard investments. But if you want access to a broader menu of choices, you often have to look beyond the 401(k) plan.
Within an IRA, for example, you often have a wider range of options to choose from. You may gain the ability to choose from thousands of ETFs, mutual funds, fixed-income vehicles and other investments to build a portfolio that's aligned with your needs. Alternatively, you might want to use an annuity for features like guaranteed income or principal protection. Again, you'll have more choices outside of your 401(k).
Potentially Lower Costs
Some 401(k) plans are expensive. You typically pay for investment expenses, and your plan might include additional recordkeeping and administration costs (among others) specific to your workplace plan. If you're no longer required to keep assets in the plan, it's worth evaluating fees to see if you can save money.
Does It Always Make Sense to Combine Accounts?
As you consider options, be aware of some potential drawbacks of pulling money out of an old 401(k) and combining assets elsewhere.
For example, if you leave your job after age 55 — but before age 59.5 — it could make sense to keep your 401(k) if you plan to take withdrawals soon. That's because you might be eligible to take 401(k) withdrawals without an extra 10% penalty during that time. That's a relatively narrow window, but for some people, it's important.
Plus, an old 401(k) might offer surprisingly low fees and excellent investment options. When that's the case, it could make sense to leave assets where they are, all other things being equal. A financial professional can explore the most important features to help you understand the pros and cons of staying put.
Finally, it's wise to discuss tax and legal considerations with a CPA and an attorney before taking action. For example, if you have employer stock in your 401(k), you might have the option to use a complicated Net Unrealized Appreciation (NUA) strategy for favorable capital gains treatment. But those opportunities aren't available for everybody, so it ultimately depends on the specifics of your situation.
The Bottom Line
When you have old accounts that are inferior to other available options (or are at risk of being neglected), it could make sense to combine those accounts. By doing so, you enhance your ability to use assets in ways that support your goals. But take some time to compare your options and verify that it makes sense. With a careful review of essential account features, you'll be able to decide what's best, and you can have more confidence that you're using the right tools for the job.