Streamline your savings: The strategic benefits of consolidating retirement accounts

According to the U.S. Bureau of Labor Statistics, the average American stays at a job for less than four years and holds around 12 jobs in their lifetime. So it’s not surprising that American workers often accumulate several retirement accounts from their various employers, as well.

But having multiple retirement accounts can make it challenging to effectively manage your retirement savings. Consolidating these accounts can provide a clearer picture of your financial situation and simplify retirement income planning. 

Learn the strategic benefits of consolidating retirement accounts, and how to navigate the process. 

The value of account consolidation in retirement planning

As you near retirement age, it’s important to look at all your available sources of income that will fund your expenses in retirement. When you have money spread across retirement accounts in different employer-sponsored plans and financial institutions, it can be difficult to keep track of how much you’ve saved. It’s also harder to create a plan for using those funds after you’ve left the workforce.

Combining all your savings in one place can give you a clearer understanding of your overall financial situation and allows your trusted financial advisor to develop a more robust plan to help you live the way you want in retirement.

For those hesitant about retirement account consolidation, Tracy Hanson, director of Retirement Solutions at RBC Wealth Management–U.S., cautions against falling for the diversification myth.

“People say, ‘I’m diversified because I have my money in various places’—the reality is, diversification comes from how that money is invested in different types of asset classes and investment products,” she says. “You can do that all with one financial institution, because your financial advisor will have access to all these different investment options that help you create a diversified portfolio.”

Key benefits of consolidating your retirement accounts

A clearer view of your financial picture and more comprehensive retirement planning are just two of the reasons you may want to consolidate your retirement savings. Other potential advantages include:

• Reduced fees: Generally, the more assets you have with one financial institution, the more opportunities you may have for reducing or eliminating account fees and lowering investing expenses. By combining accounts, you may be able to qualify for lower fees or eliminate certain account maintenance charges.
• Streamlined record keeping: Fewer accounts to manage means fewer monthly statements and fewer forms at tax time. It could also mean fewer account numbers and passwords to track.
• Simplified required minimum distributions (RMDs): Once you reach age 73 (or 75 if you were born in or after 1960), you must begin taking RMDs from most retirement accounts. Consolidating can reduce the number of distributions you have to take, which lessens the risk of miscalculating or missing a required distribution.
• Easier beneficiary management: Combining accounts makes it easier to see that your beneficiary designations are up-to-date and consistent across all your retirement savings. It also makes things simpler for your beneficiaries to manage when it comes time for them to inherit the assets.

How to consolidate: Methods and considerations

There are several ways to consolidate your retirement accounts, each with its own unique features and implications. Some common options include:

• A transfer: This common consolidation method involves moving money between accounts of the same type at different institutions. For example, you can transfer a Roth IRA from one institution to another. A benefit of this approach is that no taxes are withheld from your transfer amount. 
• A rollover: This option involves moving funds from one type of retirement account to another, such as from a 401(k) to a traditional IRA. There are two types of rollovers: direct and indirect. With a direct rollover, your employer or plan administrator moves the funds directly from one institution to another, minimizing the risk of tax penalties. An indirect rollover involves your employer or plan administrator sending the funds to you after deducting 20 percent for federal income tax. You then have 60 days to deposit the full original balance—including replacing the 20 percent withheld—into a new retirement account to avoid taxes and potential penalties.
• A Roth IRA conversion: This involves converting pre-tax retirement accounts to a Roth IRA, allowing for tax-free withdrawals in retirement. However, you must pay taxes on the converted amount at the time of the conversion. 

With employer-sponsored retirement accounts, you also have the option to leave your retirement assets in your former employer’s plan or to withdraw the assets as a lump sum distribution.

It’s important that you include your financial advisor and tax professional in this process to avoid mistakes and potential penalties.

“All roads point back to that trusted financial advisor,” says Hanson. “If you and your advisor conclude that consolidation is appropriate, they will initiate the transfer and guide you through the whole process.”

By working closely together, you can determine which method best aligns with your unique financial situation and retirement goals.

Navigating IRS rules and limitations

While there are many benefits to consolidation, it may not be the right option for everyone. The IRS has rules for which accounts can and can’t be rolled together. Here are several restrictions to keep in mind: 

• Not all accounts are compatible: Because of different tax treatments and IRS regulations, certain retirement accounts cannot be combined. This can affect the tax efficiency and potential savings of consolidation strategies.
• You can make only one IRA rollover per year: This is the rule, no matter how many accounts you have. That means careful timing is essential to maximize the benefits of rollovers while adhering to tax regulations.
• You cannot roll over an RMD from your IRA: This restriction ensures that you use your retirement savings during retirement, rather than accumulating indefinitely with tax advantages.
• Spouses can’t combine retirement accounts: Each spouse’s retirement account remains separate, since they made contributions to their accounts individually through their employers.
• Rule of 55 and potential tax consequences: If you leave your job the year you turn 55 or later, you may take withdrawals from your current 401(k) or 403(b) without the usual 10 percent early withdrawal penalty. However, this does not apply to IRAs or plans from previous employers.

Your financial advisor can review your accounts and their associated fees and investment selections to help determine where consolidation makes sense, as well as the best way to do so.

Retirement income planning is an ongoing process

Combining your retirement accounts is only the start. It’s important to regularly review how you’ve allocated your savings across different types of investments to help ensure your approach reflects your long-term goals, accounts for potential tax implications and keeps you on track for the retirement you envision.