Should You Consolidate Your 401(k)s?
Maximize Your Retirement: The Pros and Cons of 401(k) Consolidation
The Pros & Cons of Consolidating your 401(k)s
Consolidating your 401(k) simply means gathering all of your old 401(k) accounts from previous employers and combining them into a single account. This can be done in a couple of ways:
Rolling over old 401(k)s into your current employer's 401(k) plan: If your current employer's plan accepts rollovers, you can transfer your old 401(k)s into your existing account.
Rolling over old 401(k)s into an Individual Retirement Account (IRA): If your current employer doesn't accept rollovers or if you prefer to have more control over your investments, you can roll over your old 401(k)s into an IRA.
Today, we will focus on (1).
Pros of Consolidating your 401(k)s:
Simplicity: Managing one account is easier than managing multiple ones. It can save time and prevent confusion regarding various fund options, beneficiary designations, or investment strategies. Having all your 401(k) money in one place means you'll only have one statement to review, making your financial situation easier to oversee.
Easier RMD Calculations: If you have more than one 401(k) account, you must calculate and satisfy your RMDs separately for each 401(k) account. This is different than IRAs which allow you to aggregate all IRA balances to determine the RMD and then take that total RMD from just one IRA if desired.
Better Investment Options: If your current employer's 401(k) plan offers high-quality, low-cost investments, consolidating might be advantageous.
Potentially Lower Fees: Some 401(k) plans have lower administrative and management fees than others. If your current employer's plan has lower fees, consolidating can save you money.
Loan Options: If needed, many 401(k) plans allow you to borrow against your balance. Not all plans allow this, but if your current employer's plan does, consolidating could provide additional loan options.
Protection From Creditors: 401(k)s offer better protection against claims from creditors than IRAs do.
Possibility of Earlier Withdrawals: If you retire from the job providing your current 401(k) anytime in or after the year you turn 55, you can take withdrawals without penalty.
Possibility of Later Withdrawals: In certain situations, you may be able to delay required minimum distributions (RMDs) if you're still working, potentially leading to tax savings.
Ease of Access: You may have quicker, easier access to your account information and customer service resources when your investments are with your current employer.
Estate Planning: Having all of your retirement savings in one place can make estate planning easier and less complicated for your heirs.
Cons of Consolidating your 401(k) plans:
Limited Investment Choices: Employer-sponsored 401(k) plans often offer a limited selection of investment options compared to an IRA.
Possible Higher Fees: Some 401(k)s have higher administrative or investment fees than others.
Less Control: You have less control over your investment options in a 401(k) compared to an IRA.
Access to Funds: You can't access your 401(k) funds before age 59.5 without paying a penalty, with few exceptions.
Withdrawal Rules: The rules for withdrawing funds from a 401(k) can be more restrictive than those for an IRA.
Change in Employers: If you change jobs again, you may have to rollover your 401(k) once more.
Employer Risks: If your employer faces financial difficulties or goes bankrupt, it could potentially impact your 401(k) plan.
Potential Delays: Depending on your employer's plan rules, you might experience delays in accessing your funds.
Complexity of Consolidation: The process of rolling over multiple 401(k)s into a current one can be complex and require significant paperwork.
Lack of Flexibility with Withdrawals: Unlike IRAs, 401(k)s do not allow for penalty-free withdrawals for first-time home purchase or higher education expenses.
What should you do?
The decision to roll over multiple 401(k)s into a current employer's plan is a personal one, and these pros and cons might weigh differently depending on your unique situation. It's advisable to work with a financial advisor to make sure you're making the best decision for your circumstances.