Consolidate Your Retirement Accounts – Get Organized and Smart with your Investments!

By Catherine Mulcahy, CFP® on June 27, 2024

Losing track of all your retirement accounts? Who has time to get organized? We’re all busy, focusing on our jobs, our family, their health, and their well-being. Concentrating on ourselves and our retirement is often something we put off for a future time when we aren’t so busy! Through our careers and multiple jobs – who stays in one place anymore – you are probably the owner/beneficiary of multiple legacy retirement plans.

Consolidating retirement accounts under one umbrella can make life simpler and ease the burden (or guilt) of keeping track of things. Let’s face it, being organized only gets more difficult as we get older and accumulate yet more accounts!

How to Get Started with Retirement Account Consolidation

Fortunately, the considerations and steps are reasonably straightforward, but that is also where some people get tripped up: Small mistakes and oversights can mean big tax consequences.

First considerations:

• Some plans require you to contact your former HR department to initiate a transfer out of the plan, while others offer a guided process you can access by logging into your plan’s website.
• Make note of each account, including the employer/sponsor, account type (Roth vs. Traditional plans, whether the contributions were pre- or post-tax), account number, and account value.
• Determine what you want to do, including where you want to consolidate your accounts and the number of types of accounts that you will need to set up. In most cases, “like” account types can be consolidated while “unlike” account types must be kept separate. Also, confirm any differences in expenses and investment choices are acceptable.
• Review/update your beneficiaries, including their contact details.

Proceeding with the Rollover

You have a few options regarding prior employer plans – “rollover” your plan into an IRA, transfer the funds into your current employer plan, or take a lump sum payment. Implementing a “rollover” is non-taxable – let’s explore the Do’s and Don’ts to make sure yours goes smoothly.

DO’s and DON’Ts of Retirement Account Rollovers

DON’T: Transfer the contents of your retirement account to your bank account! This is considered a lump-sum payment and depositing it into a bank account or brokerage account means you’ll be on the hook to pay taxes on this money come tax time. And if you are under age 59 ½, you’ll also incur penalties!

DO: Make sure you have an account open that matches the type of account you had with your previous employer’s plan. If your account is labeled “pre-tax” or “traditional,” the funds should be transfer to a traditional IRA. If your account is labeled “post-tax” or “Roth,” the proceeds should move into a Roth IRA. With many plans today, you may have both, so be sure to check so the correct funds go to the correct account!

DO: Make sure your old plan has your current address!

DO: If your old plan is going to send you a check, have it made out to the institution where your IRA account is located for the benefit of you, NOT made out to you personally. Example: “XYZBank FBO John Smith.”

DO: Have your new account information with you when you contact the former plan provider in case the transfer can be completed electronically.

DON’T: Choose federal or state tax withholding. A “rollover” is NOT a taxable event, so no tax withholding is required.

DO: Make sure your “rollover” is deposited into your new account within 60 days! After 60 days, the IRS considers this transaction a full distribution, rather than a “rollover,” and it will be fully taxable on your tax return for the year.

DO: Invest the money you’ve rolled over! Consider when you’ll need this money, investment options, investment experience, and comfort with risk.

DON’T: Ignore the tax documents you will receive for this “rollover.” You will receive a Form 5498 and a Form 1099-R. These both must be noted on your tax return to ensure your “rollover” is considered a non-taxable event.

The process can seem a bit overwhelming, but once you have the Do’s and Don’ts down, you will be ready to go. As always, please feel free to reach out to the financial professionals at Alexandria Capital should you need assistance with this or other wealth management topics. We are happy to answer questions and provide guidance.

Plans refer to any of the following types of employer-sponsored accounts:

“Traditional” in this context always refers to plans or accounts that are pre-tax. “Roth” in this context always refers to plans or accounts that are post-tax or after-tax but are still considered qualified retirement accounts.

Tax Disclaimer
Hightower Advisors, LLC is an SEC registered investment adviser. Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material is not intended or written to provide and should not be relied upon or used as a substitute for tax or legal advice. Information contained herein does not consider an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Clients are urged to consult their tax or legal advisor for related questions.