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Is Your Retirement Account as Large as it Could Be?

October 09, 2020

When you change jobs, it’s critical to remember to create a plan for past employee sponsored retirement accounts. While you have the choice to simply leave it, you also have the option to consolidate past plans which brings all funds into one account. Here are a few things to consider when deciding what to do with numerous retirement accounts:  

IRA Benefits. Job changes open up the option to consolidate your earned 401(k) funds into one account. Oftentimes consolidating previous plans into one account can reduce paperwork, make it easier to rebalance investments, monitor progress, plan a withdrawal strategy, and maintain beneficiaries. It also may reduce administrative fees, which can add up over time, especially when factoring compound interest.  Consolidating can also qualify investors for breakpoints based on asset and trading thresholds.

It’s important to carefully consider the pros and cons of rolling former employer accounts into a personal IRA. Often, 401(k) administrators won’t advise on investments or the suitability of a rollover. IRAs offer more control over the investments and more investment options. Typically, 401(k) plans include a few dozen funds to choose from, while IRAs offer thousands of investment choices.

IRA accounts can provide more freedom if a spouse passes away. Under federal law, surviving spouses automatically receive their deceased spouses’ 401(k)s – unless the survivor has signed a waiver. IRAs usually allow multiple or contingent beneficiaries. The SECURE Act eliminated “stretch” IRAs, which allowed children and grandchildren to take minimum distributions from an inherited IRA over their lifetimes.

401(k) Benefits. On the other hand, 401(k)s carry some unique benefits. They are protected from all types of creditor judgments. Traditional and Roth IRA assets up to a certain amount are shielded from bankruptcy claims. Creditor safeguards vary from state to state so it’s important to be aware of your individual state guidelines.

Another benefit of keeping funds in a 401(k) is if you leave your job after the age of 55, you can take penalty-free withdrawals from a 401(k) account. The minimum age for withdrawing from an IRA without a penalty is 59½.

You can take up to a five-year loan from a 401(k); whereas an IRA only affords a 60-day, tax-free rollover option. The CARES Act provides some exceptions for early withdrawals from 401(k)s and IRAs and increases 401(k) loan amounts in 2020.

Carefully consider potential fees and tax implications before consolidating. It’s wise to consult a tax professional if your 401(k) includes employee stock, as special tax rules may apply. We are happy to help you decide if consolidating your accounts would be beneficial and to help you weigh advantages and disadvantages of rolling 401(k)s into a personal IRA.