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When & how to consolidate retirement accounts

Senior couple standing on boardwalk on the beach
Oliver Rossi/Getty Images

Throughout your career, you may hold many different jobs. In fact, Americans work at an average of 12 jobs between ages 18 and 54. While you might not have a retirement account at every job, you may end up collecting a handful of 401(k)s, 457(b)s, profit-sharing plans and other retirement savings over time.

Instead of leaving your money spread over numerous plans and financial institutions, you may want to consolidate retirement accounts by rolling them into one easy-to-manage account. Doing this can offer several advantages and may be a good option for your financial future. Here's what to know about pulling all your retirement accounts together.

Should I consolidate my 401(k)?

Generally, you're not required to consolidate retirement accounts when you leave a job. Some employers allow you to leave your money in the plan indefinitely. There may be benefits to leaving your account in your employer plan if allowed: You will continue to benefit from tax deferral; there may be investment options unique to your plan; fees and expenses may be lower; plan assets have unlimited protection from creditors under federal law; there is a possibility for loans; and distributions from some plan types are penalty-free if you terminate service at age 55+. Consult your tax professional prior to requesting a rollover from your employer plan.

However, consolidating multiple 401(k)s and other accounts into one offers several benefits. You might find that having just one retirement account is easier to track, comes with fewer fees, allows you to calculate distributions simply, takes less time to manage and makes things more straightforward for your beneficiaries.

Easier to manage

Diversification, or incorporating various asset types into your portfolio, is often part of a healthy investing strategy.1 You may have chosen a wide-ranging portfolio when you first opened a retirement account, but over time, market movements may have caused your account to become overweighted in particular asset classes. This is extremely common.

If you have several 401(k)s, profit-sharing plans or other retirement accounts, monitoring all of them for how they're diversified and rebalancing multiple portfolios is likely more complicated than it needs to be. Merging those accounts into one can make it much easier to cultivate and stay on top of an asset mix that matches your risk tolerance.

Fewer fees

Most retirement accounts have annual maintenance charges. Even if you no longer contribute to the plan, they still will come out of your account balance each year. Consolidating your various retirement accounts may help you save money on these and other management fees.

Simpler RMD calculation

Once you reach age 72, you're required to withdraw a minimum amount from certain tax-qualified retirement accounts. These mandatory withdrawals are known as required minimum distributions (RMDs), and missing them can lead to expensive IRS penalties. Merging your 401(k)s can make it easier to calculate and take RMDs because you have just one account to track.

Less time-consuming

Monitoring multiple retirement accounts, making contributions and withdrawals across them, and dealing with numerous statements and tax forms can take up your time. Consolidating can make managing them much less demanding, giving you time back to spend with family and friends, be involved in your community and otherwise enjoy life.

Straightforward for your estate

If you pass away while holding several accounts with various financial institutions and former employers, your executor or heirs will have to track down each one in order to ensure your assets are distributed to your beneficiaries. Drawing your retirement investments together beforehand can make it easier for your loved ones to wrap up your affairs and carry out what you intended for your money.

When shouldn't I combine my retirement accounts?

Despite the advantages of consolidating, it's not the best move in some situations. Depending on your particular circumstances, you may wonder: Can I combine IRA and 401(k) accounts? What about my profit-sharing account? Are some plans not allowed to roll into others?

The answers aren't always simple. While many kinds of retirement investments can be consolidated, some can't. Also, different accounts can have different tax benefits, investment options and rules about borrowing or taking hardship withdrawals, so you may want to discuss your options with your financial advisor to make sure you're doing the best you can with your money.

For example, say you have both pre-tax and after-tax money in your 401(k). In that case, it doesn't make sense to roll that money into a single rollover IRA where the distributions are taxable. Instead, you may want to roll pre-tax money into a regular rollover IRA and after-tax contributions into a Roth IRA.

How to consolidate retirement accounts

If you decide that consolidating your 401(k)s and other retirement accounts is right for you, you'll want to handle the transitions wisely so you don't face unnecessary taxes or penalties. The IRS has rules for when certain accounts can and can't be rolled together.

Here's an overview of retirement investments you might have and how they could be combined.

401(k)s and other qualified plans

Qualified plans include 401(k)s, 403(b)s, profit-sharing plans and other employer-sponsored defined benefit plans. You can roll a qualified plan into a traditional IRA, simplified employee pension (SEP) IRA, another kind of qualified plan without paying taxes or penalties. You also can roll a 401(k) into a savings incentive match plan for employees (SIMPLE) IRA as long as you've had the SIMPLE account for at least two years.

You can roll a 401(k) into a Roth IRA, but that would count as a Roth conversion, and you'd have to pay taxes on the transaction.

Traditional IRA

You can roll a traditional IRA into a SEP IRA without paying taxes on the transaction. You can also roll a traditional IRA into a 401(k) or 403(b) plan if your employer plan allows rollover contributions. You also can roll the money into a SIMPLE IRA as long as you've had the SIMPLE account for at least two years. If you roll the money into a Roth IRA, it's treated as a taxable Roth conversion. Also, you cannot roll money from a traditional IRA into a designated Roth account.

Roth IRA

You cannot consolidate money from a Roth IRA into any other type of account.

SIMPLE IRA

You can consolidate a SIMPLE IRA into a traditional IRA or SEP IRA. You can also roll SIMPLE funds into a 401(k), 457(b) or 403(b) plan if your employer allows rollovers. You must wait two years after establishing your SIMPLE IRA to roll it over.

SEP IRA

You can roll SEP IRA funds into a traditional IRA. You can roll SEP funds into a SIMPLE IRA if it's been at least two years since your first contribution to the SIMPLE. You can also roll SEP funds into a 401(k) or another qualified retirement account if your employer allows rollovers.

457(b)

A 457(b) plan is like a 401(k) but for governmental and some nonprofit employers. You can roll 457(b) funds into a traditional or SEP IRA. you can also roll funds into a SIMPLE IRA if it's been at least two years since your first contribution to the SIMPLE and a 401(k) or another qualified retirement account if your employer allows rollovers. Note that nonprofit 457 plans are not eligible for rollover into any other plan type, including IRAs.

403(b)

A 403(b) plan is another account similar to a 401(k), but it's for employees of public schools and certain tax-exempt organizations. You can move money from a 403(b) plan into a traditional IRA or a SEP IRA. You can roll 403(b) funds into a SIMPLE IRA if it's been at least two years since your first contribution to the SIMPLE. You can also roll 403(b) funds into a government 457 plan or another qualified retirement account if your employer plan allows rollovers.

Designated Roth account

Some 401(k) and 403(b) plans allow participants to make after-tax Roth contributions to a separate account within the plan, known as a designated Roth account. You can only transfer money from a designated Roth account into a Roth IRA or a designated Roth account in another plan.2

Other restrictions to consider

In addition to restrictions on the types of accounts that can be combined, the IRS has other rules you must follow when rolling multiple retirement accounts together.

First, you're only allowed to roll assets from one IRA to another IRA once in any 12 month period. This only applies when moving from one IRA to another—you can roll money from a 401(k) into an IRA more than once per year. The one-rollover-per-year rule also applies only to indirect rollovers, where you withdraw money from one account and deposit it into another account within 60 days. Direct transfers, in which the funds are sent from one account to another without you handling it, aren't affected.

Also, you may not be able to roll money out of an employer-sponsored plan while continuing to work for that employer. This is called an in-service rollover, and while some plans allow them, not all do. If your employer's plan allows in-service rollovers, they might limit your rollover to accounts in which you're 100% vested.

Lean on experts for guidance

The rules for rolling over retirement accounts are complex, and many exceptions and limitations may apply to your situation. For that reason, it's a good idea to discuss consolidating retirement accounts with your financial advisor. They can help you track down your accounts, complete the necessary paperwork, make you aware of any tax implications and select investments for your new account.

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1 While diversification can help reduce market risk, it does not eliminate it. Diversification does not assure a profit or protect against loss in a declining market.

2State tax rules may differ from federal rules governing the tax treatment of Roth IRAs, and there may be conflicts between federal and state tax treatment of IRA conversions. Consult your tax professional for your state's tax rules.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.
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