Consolidating Accounts

By Jordan Sheppherd


A common tenant of modern financial planning is the consolidation of multiple accounts into one or two primary accounts. Many of us have changed jobs, often creating new retirement accounts with each new employer. The end result is a complexity of accounts, institutions, and paperwork that obfuscates our true financial position. Consolidation allows you to bring your retirement savings into one or two accounts, with one financial firm. You have better ability to assess your investment performance and understand your asset allocations. Consolidation is generally a good idea, but it is essential to understand the process.

You can consolidate most of your accounts into either a 401(k) or an individual retirement account (IRA). 401(k) plans give you better access to you money, while the IRA tends to offer a wider array of investment options, including real estate and precious metals if you choose a self-directed account. If you need to preserve your future ability to take a loan from your retirement assets, you should consolidate into a 401(k) because you generally cannot take loans from an IRA.

While combining accounts is advised, there are some situations that prevent consolidation. For example, an IRA account can receive money from most other accounts, expect for those accounts funded with after-tax dollars, such as Roth IRAs. Similarly, 401(k)s can be funded only with money and assets from other 401(k)s and employer-sponsored plans. It is essential that you understand what accounts you currently have and how those accounts can be best and legally consolidated.

Consolidation is often cost-free, but be sure to rollover your funds from one account to another. Contact both institutions involved for a hassle-free experience. You want to avoid taking the funds as a distribution, since such a distribution carries with it substantial IRS penalties and taxes. Your goal with consolidation is to simplify your paperwork burden and to best understand your financial situation. Be sure to also understand any fees for maintaining and/or consolidating accounts.

Financial planning is important, but it does not have to be overly complex. Consolidation simplifies that paperwork and allows you to best assess your own current situation. This assessment is the foundation for ongoing refinement of your plan and a future successful retirement.

Source: NU Wire Investor 

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