There are probably more than one retirement account for you if you’ve had more than one job over the years. If so, it may be in your best interest to combine your accounts into one. Here’s why.
Ever find yourself drowning in a sea of retirement paperwork? You’re not alone. As we hop between jobs throughout our careers, we often leave a trail of 401(k) accounts behind us like breadcrumbs. According to the Bureau of Labor Statistics, the average person will work at more than 12 jobs during their lifetime. That’s potentially a lot of different retirement accounts to keep track of!
So should you consolidate these accounts or keep them separate? There’s no one-size-fits-all answer, but I’m gonna break down everything you need to know to make the best decision for your financial future.
The Job-Hopping Reality of Modern Careers
People used to work for the same company their whole lives, but those days are over. If you were born between 1957 and 1964, the Bureau of Labor Statistics says you had 6-7 jobs after you turned 24. Today’s workers change jobs approximately every 2. 8 years, which is equal to 14 or 15 jobs in a lifetime!
With each job change, you potentially create another retirement account This accumulation can quickly become overwhelming – kinda like collecting too many kitchen gadgets or workout equipment that you rarely use.
Understanding Your 401(k) Options
Before we get into the question of consolidation, let’s quickly go over what a 401(k) is. A 401(k) is a retirement plan offered by your employer. You can contribute by having money taken out of your paycheck every week. A lot of employers offer these as benefits, like health insurance or time off.
These accounts are “tax-deferred,” which means you don’t have to pay income taxes on the money until you take it out in retirement. Some employers will even match your contributions up to a certain point. This is like getting money for free to use for your future.
When you leave a job, you have several options for your old 401(k):
- Transfer it into your new employer’s 401(k)
- Roll it into an Individual Retirement Account (IRA)
- Leave it where it is
- Cash it out (generally not recommended due to taxes and penalties)
The Case for Consolidation: One 401(k) to Rule Them All
Having multiple retirement accounts at different banks can make managing your money more difficult than it needs to be. Here are some compelling reasons to consolidate:
1. Simplifies Account Management
Managing one account is obviously easier than juggling multiple accounts. You’ll only have one website to log into, one statement to review, and one customer service line to call when you have questions.
When you have multiple accounts, the administrative hassle multiplies. Each account requires its own login, password, and documentation. As Doug Hutchinson from Assembly Wealth points out, “Imagine you want to rebalance your retirement savings. Multiple accounts require multiple logins. After accessing all your accounts, you still need to compile the info so you can (finally) get a high-level overview of your investments.”
2. Clearer Investment Strategy
Having all your retirement money in one place makes it easier to implement a cohesive investment strategy. You can see your entire portfolio at a glance and make informed decisions about your asset allocation.
With scattered accounts, you might inadvertently over-invest in certain sectors because you can’t easily see the big picture. The holdings in a Growth Fund in one account might overlap significantly with the holdings in a Capital Appreciation Fund in another account.
3. Potentially Lower Fees
Some 401(k) plans have lower fees for larger account balances. By consolidating, you might qualify for these reduced fees, saving you money over time.
According to Assembly Wealth, “Every dollar paid in account maintenance fees or fund management fees is money you won’t have in retirement.” Some 401(k) plans charge monthly or annual maintenance fees that could be eliminated through consolidation.
4. Better Investment Options
Not all 401(k) plans are created equal. Some offer a wide range of investment options, while others are quite limited. As the Assembly Wealth article cleverly puts it, “Compared to an IRA, a 401(k) is like shopping at a convenience store vs. a supermarket.”
By consolidating into an IRA or a 401(k) plan with better options, you can access investments that better align with your financial goals.
5. Simplifies Estate Planning and Required Minimum Distributions (RMDs)
For those approaching retirement, consolidation offers additional benefits:
- Makes it easier for beneficiaries to retrieve your assets
- Simplifies the calculation of Required Minimum Distributions (RMDs)
- Helps avoid the risk of forgotten accounts being seized by the state (escheatment)
The IRS requires withdrawals from retirement accounts beginning at age 72 (or 73 for those born between 1951-1959). If you fail to take the full RMD amount, you could face a tax penalty of up to 25%!
The Case for Keeping Multiple 401(k)s
Despite the advantages of consolidation, there are some valid reasons why keeping multiple accounts might make sense for some people:
1. Access to Unique Investment Options
Some employer plans offer access to institutional-class funds with lower expense ratios than what’s available to individual investors. If your old 401(k) has exceptional investment options that you can’t get elsewhere, it might be worth keeping it separate.
2. Greater Investment Diversity
Having accounts at different institutions might provide access to a wider range of investment options than what’s available in a single plan. This could potentially allow for better diversification across your entire portfolio.
3. Asset Protection Benefits
In some states, 401(k) plans offer greater protection from creditors than IRAs. If asset protection is a concern, this might influence your decision.
4. Loan Privileges
While I generally don’t recommend borrowing from retirement accounts, active 401(k) plans sometimes allow participants to take loans. This option isn’t available with IRAs.
Rolling Into an IRA: The Popular Middle Ground
For many people, rolling old 401(k) accounts into a Traditional IRA represents an attractive compromise. Here’s why:
1. You Choose the Institution
Unlike employer-sponsored 401(k)s, you get to select where to open your IRA. This freedom allows you to choose an institution that aligns with your needs, whether that’s low fees, excellent customer service, or specific investment options.
2. More Investment Choices
IRAs typically offer significantly more investment options than most 401(k) plans. While a 401(k) might limit you to a pre-selected menu of funds, an IRA gives you access to a much wider universe of investments.
3. Your Financial “Home Base”
Think of a Traditional IRA as your retirement “home base.” As SoFi notes, “As you move through your career, you can roll old 401(k) accounts into a Traditional IRA that’s not going anywhere—it’s your home base.”
What About Roth Options?
It’s important to note that traditional 401(k)s and Traditional IRAs share the same tax status (tax-deferred), which is why they can be combined. However, Roth IRAs have a different tax treatment (contributions are made with after-tax dollars, but qualified withdrawals are tax-free), so they cannot be combined with traditional retirement accounts.
If you have Roth 401(k) accounts, these would need to be rolled into a Roth IRA, not a Traditional IRA.
Practical Steps: How to Consolidate Your Accounts
If you decide that consolidation is right for you, here’s how to do it:
Option 1: Rolling into Your Current 401(k)
- Contact your current 401(k) provider to confirm they accept rollovers
- Request a direct rollover from your old 401(k) provider
- Follow your current plan’s process for allocating the new funds
Option 2: Rolling into an IRA
- Open a Traditional IRA at your chosen financial institution (if you don’t already have one)
- Contact your old 401(k) provider and request a direct rollover to your IRA
- Follow up to ensure the transfer is completed
- Allocate the funds according to your investment strategy
The key here is requesting a “direct rollover” rather than taking a distribution. With a direct rollover, the money goes straight from your old retirement account to the new one without passing through your hands, avoiding any tax consequences.
Factors to Consider When Making Your Decision
When deciding whether to consolidate, consider:
- Investment options: Compare the investment choices in each account
- Fees: Look at maintenance fees, expense ratios, and transaction costs
- Services offered: Some plans provide educational resources or advisory services
- Your age and timeline: Your proximity to retirement might influence your decision
- Backdoor Roth IRA plans: If you’re planning to do a backdoor Roth IRA conversion, having retirement funds in a 401(k) instead of a Traditional IRA could be advantageous
Final Thoughts: Finding Your Balance
There’s no right or wrong answer to whether you should have one 401(k) or multiple accounts. The best choice depends on your specific situation, goals, and preferences.
For most people, consolidation offers clear advantages in terms of simplicity, clarity, and potentially lower costs. However, there are legitimate reasons why keeping certain accounts separate might make sense in specific circumstances.
If you’re unsure about the best approach for your situation, consider consulting with a financial advisor who can provide personalized guidance based on your complete financial picture.
Remember, the most important thing isn’t how many accounts you have, but rather making sure you’re consistently saving for retirement and investing those savings wisely. Whether you choose one account or several, staying engaged with your retirement planning is the key to long-term financial success.
Frequently Asked Questions
Can I have both a 401(k) and an IRA?
Absolutely! The IRS doesn’t limit the number of retirement accounts you can have. Many people maintain a 401(k) with their current employer while also having an IRA for additional retirement savings or to hold funds rolled over from previous employers.
Will I pay taxes if I consolidate my accounts?
Not if you do a direct rollover. When done properly, consolidating retirement accounts with the same tax status (e.g., traditional to traditional) should be a tax-free event.
What happens to my 401(k) if I forget about it?
Accounts that are inactive for long periods may be considered “abandoned” and could eventually be turned over to the state through a process called escheatment. The IRS might consider this a taxable distribution, triggering taxes and potential penalties. This is one good reason to keep track of all your retirement accounts!
Is it better to roll my old 401(k) into my new employer’s plan or into an IRA?
This depends on your specific situation. IRAs typically offer more investment options, but some employer plans have access to institutional-class funds with lower fees. Compare the investment options, fees, and features of both before deciding.
Tighter control over your money
In addition to multiple 401(k) retirement accounts, you may even have an IRA or two.
There’s nothing inherently wrong with having more than one retirement account at different banks, but it can be hard to keep track of, expensive, and confusing. The good news is you may be able to combine some of those accounts.
Fewer accounts can save you frustration Multiple account statements, forms, website passwords, phone numbers … there’s a lot to keep track of when you have multiple retirement accounts. Consider combining accounts to make things simpler. Doing so could make the task of managing your money a lot less frustrating and give you greater control.
Let’s say John has three accounts. He gets a statement for one of them that shows 90% of his money is invested in bonds.
On its own, this might seem overly conservative. But, if John’s other accounts are more heavily weighted in stocks, his overall portfolio might be well diversified. Having his money in three places at once makes figuring his overall investment mix complicated. He might be better off combining the three accounts—or getting professional advice.