By John Hasenberg
Senior Vice President, Financial Advisor
Morgan Stanley Smith Barney
Be Inkandescent Magazine • April 2010
A traditional IRA here. A rollover IRA there. Four job changes (so far!) and three retirement plan account balances left in the plans of former employers.
Over the years, you may have accumulated a significant sum in various retirement accounts. While keeping those assets in various accounts at different financial institutions isn’t necessarily a bad thing, there is a strong case for consolidating them into one account with the same financial institution.
Consolidating your retirement savings, where appropriate, offers several benefits including:
- Comprehensive investment strategy: Over time, your investment objectives and risk tolerance may have changed. Thus, it can be difficult to maintain an effective retirement investment strategy—one that accurately reflects your current goals, timing and risk tolerance—when your savings are spread out among multiple financial institutions. Once you begin the consolidation process, you can choose investments that match your current goals and objectives.
- Greater investment flexibility: Often, 401(k) plans or other employer-sponsored retirement programs—and even many IRAs—have limited investment menus. A self-directed IRA generally offers you the ability to choose from a wide range of investments including stocks, bonds, mutual funds, managed accounts and more.
- Simplified tracking: It is easier to monitor your progress and investment results when all your retirement savings are in one place.
- Less paper: By consolidating your accounts, you will receive one statement instead of several. That simplifies your life while protecting the environment.
- Lower costs: Reducing the number of accounts may result in reducing your account fees and other investment charges.
- Easy-to-calculate Required Minimum Distributions (“RMDs”): Once you reach age 70½, having fewer retirement accounts to manage means fewer RMDs to calculate every year. However, under recent legislation passed by Congress, RMDs are not required to be taken in 2009.
- Knowing where your assets are: If your employer-sponsored retirement plan is terminated or abandoned (an “orphan plan”) or is merged with or transferred to a retirement plan of another corporation after you leave, it may be difficult to locate the plan administrator to request a distribution of your benefits or to change investments. Your IRA assets are always accessible if you want to change your investment strategy or need to take a distribution.
What Can Be Consolidated?
Regardless of how many different types of retirement accounts you have or where they’re held, they may be eligible for consolidation including IRAs held at financial institutions (banks, credit unions, mutual fund companies, etc.).
Retirement plan assets held at former employers are also eligible, including:
- 401(k) plans
- Profit-sharing plans
- Money purchase plans
- Defined benefit plans
- Keogh plans
- ESOP plans
- Government 457(b) plans
- 403(b) plans
*Consolidating Your Retirement Savings Is Easier Than You Think
Depending on the types of retirement assets you want to consolidate, there are several ways to combine them into a single account.
- IRA-to-IRA transfers: Ask the IRA custodian where you will be establishing your account to help you complete their IRA-transfer paperwork. Once you’ve set up your IRA, the custodian will do the rest, including contacting your previous IRA custodian(s) to get your assets moved over. There’s no limit on the number of IRA-to-IRA transfers that you can complete in any given year. (However, please note that a Roth IRA can be consolidated only with another Roth IRA.)
- IRA-to-IRA rollovers: You can ask your current IRA custodian to send you a check for the amount invested in your IRA. You will then have 60 days to deposit the funds into another IRA without incurring any current tax liability. Note that your former IRA custodian will report the amount as a distribution on IRS Tax Form 1099-R; your new IRA custodian will report the rollover contribution on IRS Tax Form 5498. If you miss the 60-day time period, taxes and penalties may apply. IRA-to-IRA rollovers are restricted to one every 365 days per IRA.
- Direct rollover from qualified plan to an IRA: Ask your previous employer(s) about the paperwork needed to complete a direct rollover of your qualified retirement plan assets to your IRA. The assets will be transferred once you complete the paperwork. Note that your former employer’s plan will report the amount as a distribution on IRS Tax Form 1099-R; the IRA custodian will report the rollover contribution on IRS Tax Form 5498.
- Indirect rollover from qualified plan to an IRA: Like the IRA-to-IRA rollover, you can ask your previous employer(s) to send you a check for your vested plan balance and then redeposit those funds into an IRA or other qualified retirement plan within 60 days. However, the plan trustee will be required to withhold 20% as mandatory federal withholding. You will need to make up that 20% when you redeposit the funds into an IRA or the amount withheld will be subject to taxes and possibly penalties if you are under age 59½.
Speak with your tax advisor about these and other rules that may apply when consolidating retirement plan assets.
Some Final Thoughts about Consolidation
Notwithstanding the many benefits to consolidating your retirement accounts, there are also some caveats to keep in mind. For example, while many qualified plans allow for loans, you cannot take a loan from an IRA. Thus, once you rollover a qualified plan into an IRA, the ability to take a loan is no longer available. Note: Few qualified plans allow loans to be taken out by former employees.
Another consideration is required minimum distributions. Upon reaching age 70½, owners of a traditional IRA must begin taking required minimum distributions or face stiff IRS penalties (except during 2009, as provided by the Worker, Retiree and Employer Recovery Act of 2008). If the plan permits, qualified plan participants can delay taking required minimum distributions if they are still working after attaining age 70 1/2.
That said, combining your retirement assets in a single IRA can help you take control of your financial future. Your tax and financial advisors will be able to assist you in determining if consolidation makes sense given your specific circumstances and goals. But don’t wait any longer to find out. Your retirement will be here sooner than you think.
About John Hasenberg
John Hasenberg is a Senior Vice President and Financial Advisor at Morgan Stanley Smith Barney located in Washington, DC, and may be reached at (202) 861-5101 or www.fa.smithbarney.com/hasenberg.
Morgan Stanley Smith Barney LLC and its affiliates do not provide tax or legal advice. To the extent that this material or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.
© 2010 Morgan Stanley Smith Barney LLC. Member SIPC.