Should You Consolidate Your Retirement Accounts?

If you’ve been saving for retirement for a number of years, all the while advancing in your career and moving between jobs, you might have a number of different retirement accounts spread out across a number of different companies.

Managing all of those accounts can get confusing. You might start to lose track of where each account is, which ones you’re contributing to, and how you’re investing within each one.

It can also be inefficient. Maintaining multiple plans might keep you invested in higher cost mutual funds than are available elsewhere, as well as making it difficult to both implement your desired investment plan and to rebalance over time as the markets shift, all of which can make it harder for you to reach your ultimate investment goals.

Consolidating your retirement accounts can solve a lot of those problems, but figuring out when to consolidate and how to consolidate the right way isn’t always easy. This post will help you figure it out.

Which Retirement Accounts Are You Allowed to Consolidate?

Before getting into the decision about whether or not to consolidate your retirement accounts, it’s helpful to understand which accounts you’re even allowed to consolidate in the first place.

There are many different types of retirement accounts, and you can click here for a detailed chart from the IRS that shows you exactly which types of accounts can be combined. But there are two common scenarios that many people often face.

The first common scenario is having one or more retirement accounts from old employers, typically 401(k)s and/or 403(b)s. You have a few options when it comes to those accounts:

Leave them where they are.
Roll one or more of them over into your current employer’s 401(k) or 403(b), as long as it accepts incoming rollovers.
Roll one or more of them over into an IRA with the investment provider of your choosing.

The second common scenario is to have multiple IRAs with either the same provider or different providers. You may have opened them at different times, or you may have multiple Rollover IRAs that were opened in order to accept rollovers from old employer plans. This situation also presents you with a few options:

Leave them where they are.
Roll one or more of them over into your current employer’s 401(k) or 403(b), as long as it accepts incoming rollovers.
Combine them into a single IRA with the same provider. The catch is that unless you want to do a Roth conversion and pay the associated taxes, traditional IRAs should only be combined with other traditional IRAs and Roth IRAs should only be combined with other Roth IRAs.

An ideal consolidation would leave you with between one and three retirement accounts — some combination of: a retirement plan with your current employer, a traditional IRA, and a Roth IRA.

But maximum consolidation isn’t always the best route. Sometimes you’ll have to make a choice between consolidation and optimization. Which brings us to…

Five Factors to Consider Before Consolidating Your Retirement Accounts

The goal of consolidating your retirement accounts is generally two-fold:

Simplification: By reducing the number of retirement accounts you have to manage, it’s easier to keep track of everything and to consistently implement your desired investment plan.
Optimization: By consolidating your money in the best retirement accounts available to you, you can maximize the amount of money that’s invested in the best investment options you have.

The catch is that those two goals don’t always go hand in hand. Sometimes you can combine all of your retirement accounts into the one that offers the best investment options and the lowest costs, which is a win all the way around. But sometimes maintaining access to the best investment options will require keeping multiple accounts open, in which case you’ll have to make some tough choices.

Here are the major factors you should be considering as you decide whether or not to consolidate your retirement accounts.

1. Investment Choices

First and foremost, you need to be able to implement your desired investment plan. So before consolidating, there are two big questions you need to ask:

Which retirement accounts offer investment options that fit your plan?
Which retirement accounts offer those investment options at the lowest cost?

One of the benefits of rolling old employer retirement plans into an IRA is that you have full control over your investment options and can therefore choose high-quality, low-cost funds.

But some 401(k)s offer even better and lower-cost mutual funds than you can get from an IRA or from your current employer plan, in which case you might be better off leaving that money where it is instead of consolidating.

2. Other Fees

In addition to the costs associated with the individual investment options, some 401(k)s and IRAs come with administrative fees and management fees that add to the cost of your investments and drag down your returns.

If you can avoid those fees by either rolling your money out of an old retirement plan or transferring to a new IRA provider, you’ll likely improve your odds of success.

3. Convenience

The fewer retirement accounts you have, the easier it is to keep your overall investment plan on track. In some cases, it may even be worth paying a little bit more in order to have all your retirement money in one, easy-to-manage account.

4. Backdoor Roth Eligibility

If your income is too high for regular Roth IRA contributions, you might be interested in using the ‘Backdoor Roth IRA’ strategy.

The catch with this strategy is that it typically requires you to not have any money in a traditional IRA, at least if you want to avoid taxes. So if this is something you want to do, you might first need to move your traditional IRA money into your current employer plan, or at least avoid rolling old employer plans into a traditional IRA.

5. Creditor Protection

If you have a lot of retirement money saved up and you’d like to protect it from creditors in the case of bankruptcy, you’ll need to consider the various levels of protection offered by different types of retirement accounts.

401(k)s and other employer plans offer unlimited creditor protection, while up to $1,283,025 in IRAs is protected during bankruptcy, with some variation from state to state in terms of general creditor protection.

If you have significant retirement savings, the limited protection could be a reason to think twice before rolling your employer plan into an IRA.

Consolidating the Smart Way

The question of whether to consolidate your retirement accounts really comes down to balancing simplicity with optimization. In many cases consolidating will allow you to accomplish both goals at the same time, but in others you might have to sacrifice one to support the other.

At the end of the day, there’s often at least some level of retirement account consolidation that both makes your life easier and puts more of your money into better investments. It’s that rare win-win that’s definitely worth exploring.

Matt Becker, CFP® is a fee-only financial planner and the founder of Mom and Dad Money, where he helps new parents take control of their money so they can take care of their families.

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