Should You Consolidate Retirement Accounts?

By Justin Pritchard, CFP®

Over time, it’s easy to find yourself with retirement accounts scattered in multiple places. Maybe you have old 401(k) plans from various jobs, or you opened IRAs in different places for new investment strategies.

Regardless of the cause, all of those accounts can be a pain to keep track of. So, should you consolidate retirement accounts into one place, and what do you need to know if you’re considering this?

Briefly, “consolidate” in this case means combining multiple accounts. So, for example, you could take several old 401(k) accounts and move them into a single IRA if it makes sense to do so.

Getting everything under one roof can simplify life. That alone might motivate you to move forward, but there are other pros and cons to be aware of before transferring assets.

On this page:

  • Advantages and disadvantages of consolidating
  • How to combine your accounts
  • Frequently asked questions (FAQs)

We’ll also debunk at least one popular myth that clients often believe is a benefit of consolidating their retirement accounts.

Continue reading below, or get similar information from this video.

Potential Advantages

You typically have less to keep track of when you combine accounts.

Easier investment management: With fewer accounts, it’s easier to ensure that your investment portfolio is built the way you want. For instance, you can ensure that you have the right amounts of stocks vs. bonds along with international exposure. Because of that, you’re more likely to stay in balance. It’s also easier to take income from those investments in retirement years.

Less paperwork: When you have numerous accounts, you’ll get more paperwork each year. That might include tax forms, disclosures, statements, trade confirmations, and other clutter that you need to keep track of. Plus, you may want to recycle those documents or destroy them for your privacy and security.

RMD management: Eventually, you may need to take required minimum distributions (RMDs) from pre-tax retirement accounts. By combining those accounts, you’ll have a single calculation, and you’re less likely to miss an account. While you can generally combine or “aggregate” RMDs for certain IRAs, you cannot aggregate 401(k) RMDs, so every account needs its own RMD.

Better pricing? You might pay less by combining multiple accounts. That’s not always true, but there are two potential opportunities for saving money:

  1. If each account charges an annual fee, you’ll pay less after reducing the number of accounts.
  2. If higher asset levels lead to lower costs, you can save money. That might happen when you qualify for annual fee waivers, less expensive mutual funds, or lower fee tiers with a financial advisor.

Fewer passwords: The same is true for usernames and passwords. Unless you’re re-using the same password (which is not a good idea—especially with financial accounts), you’ll need to keep track of a different password for every custodian you use.

Beneficiary management: When you die, assets in retirement accounts can go to designated beneficiaries. Using beneficiaries can offer tax opportunities and make things (relatively) quick and easy for your heirs. But you need to keep your beneficiaries up to date. If things change, it’s easier to do that when you have fewer accounts. Things can get ugly when an account falls through the cracks.

Easier for heirs and executor: Along similar lines, you might want to get your affairs in order so that managing assets is streamlined for your personal representative (or “executor”). The job is harder if they need to chase down numerous accounts and distribute from each one. They need to make more phone calls and fill out more forms when you have extra accounts.

Leave employer behind: When assets are in an employer plan, you might want to take control of your savings. Employers choose the vendors that handle your money, influencing which investment options are available and how much you pay. By leaving those employer plans, you gain a significant amount of control—but there are potential disadvantages (more on that below).

Prepare for aging: It’s no fun to think about, but you’re not getting any younger. All of us become less skilled at financial management as we age. By simplifying things, you’re less likely to run into trouble as cognitive decline begins. That said, having everything in one place can also make things easier for con artists if you get tangled up in a scam.

Potential Pitfalls

While combining all of your retirement accounts may seem appealing, it’s important to be aware of some potential issues.

Employer plan advantages: When you have money in an employer plan, you shouldn’t always consolidate your 401(k) accounts into an IRA. Here are just a few examples of reasons to leave money where it is:

  • You might be allowed to take penalty-free distributions after age 55 (or earlier, in some cases—especially for 457 plans or public safety workers).
  • You might be able to manage taxes on employer stock with NUA.
  • You might have unique investment options (like a stable value fund) or low fees in your plan.
  • Money in a 401(k) would generally not interfere with backdoor Roth contributions.
  • There may be other reasons described in this page on pros and cons of rolling to an IRA.

Advisor bias: If a financial advisor or investment firm suggests that you consolidate your retirement accounts, be aware of their incentives and biases. They might earn additional compensation, which might be fine. But you could also be getting conflicted advice. If you trust the person’s judgment or their compensation is unchanged (maybe they charge flat fees, for example), this is less of an issue.

Too many eggs in one basket? What if you consolidate everything with one custodian and that provider has problems? For example, the company could go bankrupt or see theft from customer accounts. Or, hackers might get into your account and steal funds. This is a complicated area that deserves a more thorough treatment in another article. But some points to consider include:

  • Your investments are in the markets. If a custodian goes bankrupt, the investments in your account might or might not lose value. Another custodian would likely take over the accounts, and you’d have the same investments.
  • Custodians typically have insurance against misappropriation of funds, and they often purchase additional coverage to help with larger accounts. But there may be limitations, so it’s critical to research this topic carefully.
  • Keep your passwords secure. When accounts are hacked, you might not be responsible for losses or theft (seek guidance from your custodian). However, if you share your password, fail to keep it secret, or otherwise enable the event, you could be responsible for any losses.

Diversifying custodians seems to make sense intuitively, but most people don’t do it, and I’m not sure how much value there is in that practice (unless or until something goes wrong—then it would have been the right thing to do).

Commingling funds: Although it’s rare to have this issue, it’s not to be ignored. An IRA can hold money from several sources, including:

  • Regular contributions to your IRA each year
  • Rollovers from workplace retirement plans

When you mix those money types together, you may be unable to separate them later. That’s important, because funds that originated in an ERISA-covered employer retirement plan might have special benefits. For example, they might have better creditor protection, or they might be eligible for rolling into another workplace plan that restricts the source of funds you use. Most people won’t care about this one, but it can trip you up occasionally.

How to Consolidate Retirement Accounts

If you decide to combine your accounts, the process involves moving assets from the former account to a new home.

  1. Identify the receiving account: Open a “receiving” account if you don’t already have an IRA or similar account open for consolidating.
  2. Request transfers: Contact your retirement plan providers to find out how to move assets. When moving from an IRA, you’ll most likely submit a form (and a statement copy) to the receiving account custodian. When moving from a 401(k), you typically need to provide instructions to your former employer’s 401(k) vendors.
  3. DIY or get help from an advisor: If you’re comfortable doing everything yourself, you can submit requests or make phone calls on your own. But if you want help, a financial advisor can help you navigate the process.

Important: When transferring retirement accounts, it may be best to complete direct transfers. Those might be known as “direct rollovers” or “trustee-to-trustee” transfers. That way, you do not take possession of the money, and there are fewer opportunities for tax surprises. An alternative is to do a 60-day rollover, but that strategy can open the door to problems like taxes and tax penalties.

Consolidating Roth IRAs?

Roth IRAs can seem complicated with various 5-year rules that determine when you can take tax-free income. Still, you can combine Roth accounts to reduce clutter without necessarily causing problems.

For a “qualified distribution” that gets tax-free treatment, satisfying a 5-year rule is one of the requirements. That means you must have funded a Roth IRA at least five years before taking a distribution from a Roth IRA. But you don’t necessarily have to use your oldest Roth account—what matters is that you started funding Roth IRAs at least five years ago.

When you convert assets from pre-tax to Roth, things can get more complicated. Those dollars—and each conversion—could be treated separately. Be sure to review your situation with a tax expert before taking distributions from an IRA.

What About Roth 401(k)?

If you have Roth money in a workplace plan like a 401(k) or 403(b), you can consolidate those accounts into a single Roth IRA, if you want. Note that the 5-year rule could depend on when you first funded an IRA—not when you started contributing to Roth 401(k). So, it’s wise to put money into a Roth IRA as early as possible just to get the clock ticking.

FAQs

Is it better to have multiple retirement accounts?

Having more retirement accounts isn’t necessarily better, but different accounts can offer different benefits. For example, having pre-tax and Roth accounts provides tax diversification, and those accounts cannot be combined. Likewise, different providers might have a different set of investment options. An employer’s 401(k) may have limited options to choose from, but those plans could also offer unique options like stable value funds.

Can I combine my retirement accounts?

You can generally combine accounts when they have the same tax features and the same owner. For example, you can consolidate several pre-tax IRAs into one, and you can typically roll pre-tax 401(k) money into the same account. Even SEP and SIMPLE accounts can be combined, in some cases, although SIMPLEs have unique restrictions. See this IRS resource for more details.

Can spouses combine accounts?

No. Retirement accounts are individual accounts, and spouses cannot combine IRA, 401(k), 403(b), TSP, or similar accounts. However, you can name your spouse as a beneficiary, and that person would receive assets relatively quickly after your death. Consult with an estate planning expert to decide what’s best. Joint IRAs do not exist, but joint accounts are allowed for non-retirement money. Moving money out of a retirement account to consolidate assets may have tax consequences.

How many retirement accounts can I have?

There is no limit to the number of retirement accounts you’re allowed to have open. However, your ability to add money to those accounts may be limited. For example, the IRS sets maximum contribution limits that might apply across multiple accounts, and accounts like 401(k) plans may only allow contributions via rollovers or salary deferral.

Will investments perform better in a bigger account?

Clients often wonder if they’ll do better by consolidating assets into one account. The thinking is that a bigger account balance can potentially grow more. Unfortunately, this is largely untrue. Account performance depends primarily on the investments you use, and you can often use the same (or similar) investments in multiple accounts. For example, if each account gains 6%, that’s the same as a single big account growing by 6%, and the dollar amounts should be the same either way. That said, you might be able to reduce fees, as described above.

Next Steps

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