Does your retirement plan look like a collection of leftovers in the back of a refrigerator?
In a bygone era, it was common for a person to work for one or two companies over an entire career. The company gave them a pension, and off they went into retirement. People who changed jobs a lot found it necessary to explain why.
Since that time, retirement planning shifted to self-managed vehicles such as the 401(k) and IRA. Constant reorganizations, buyouts and bankruptcies have made job changing much more common, and according to an article on the jobs website Monster.com, it is common for baby boomers to have had twelve jobs by age 48.
A job change means we must do many new things: relocation, learning the new team and responsibilities, new schools, new doctors. Often we postpone moving the 401(k) from our old job, or if we do take time to do something, we roll the old 401(k) account into an IRA. In cases where a balance is small, the plan simply mails a check, which amounts to an early distribution, and causes taxes and penalties. A trail of these old accounts builds up over time.
I have seen clients who had a half-dozen IRAs, old 401(k) plans, and other mutual funds. This leads to a disjointed investment strategy. Each account is invested in a mutual fund or two. Investments become a scattered clutter that is too much effort to bring under control. Moreover, it’s hard to know how the money is invested, how much we are paying in fees, and, once age 70 arrives, calculating a Required Minimum Distribution becomes a feat of accounting. There can be other surprises, too, such as the old account that has a beneficiary designation to a former spouse or a deceased parent. We sort it all out, and so can you.
Today, many companies with 401(k) plans offer the ability to “roll in” balances from IRAs or former 401(k) plans. Increasingly, it is possible even to save additional money on a post-tax basis, and convert these balances into a Roth IRA, paying little or no tax on the conversion. There is even a strategy called the “mega-back-door Roth.” Under the right circumstances, it is possible to build a large tax-free retirement fund.
The major discount brokerages can help you get started. Here are some links with more information on the process:
There are many approaches to simplifying and consolidating retirement accounts, but there can be tax complications as well. Inherited IRAs, for example, are taxed differently than a person’s own IRAs. Spouses cannot combine retirement accounts. To take full advantage of the more advanced strategies, it may be cost-effective to work with a financial professional.
If this is you, you’ll thank yourself if you do not put it off any longer. It is time to consolidate your retirement accounts and take control of your future.