Consolidating Your Retirement 101

Retirement is approaching. Do you have a comprehensive overview of your retirement funds and how you will manage them when you actually do retire? A surprising number of people do not know much about their retirement funds other than that they exist. Some don’t even realize how many sources of retirement funds they have.

This is one of the main reasons why consolidating your retirement funds makes sense as you get closer to retirement age. They will be easier to manage and may save you money in the end through greater attention and fewer fees.

How do you go about consolidating retirement accounts? The mechanics are important, but so is consolidating them within a master plan.

• List Retirement Income Sources – The point here is to estimate the starting cash and the cash flows you will have during retirement. Your primary bank account and your Social Security/Pension are obvious sources, but you may have other, less obvious sources you have forgotten about. Do you have any old 401(k)s from previous jobs? Perhaps you have an insurance policy that you plan to cash in? Do you plan to downsize and sell your home during retirement? Check for abandoned bank accounts, safe deposit boxes, old savings bonds, real estate interests, precious metals, and any other asset you may have that you can liquidate at or before retirement.
• Make/Update Your Financial Plan – Given the above income sources, your financial plan should be adjusted to account for how close you are to retirement, your risk tolerance, and your financial needs to meet your retirement goals. Consolidation of retirement assets should be done within the diversification goals you set. Start by determining how much you need in a more liquid form – cash, CD’s, and money market funds – to serve as your emergency fund. Then determine your preferred ratio of conservative, lower-return investments (bonds and similar vehicles) to riskier, higher-return equities. Does what you have match up with what you want? If not, it is time to consolidate and rearrange. If so, there may not be much reason to consolidate, unless you can do so easily and without penalty, such as consolidating bank accounts.
• Do Cost/Benefit Analysis – Consider the costs and benefits of changing the individual assets. For example, there is no reason at all to hang onto a matured savings bond – cash it in and apply it to one of the other streams. Assets such as CDs should be transferred once they mature. For most people, the biggest question is deciding whether to consolidate IRAs and 401(k)s. If your accounts are doing well separately and you do not mind keeping track of them, your best bet may be to do nothing. Underperforming assets may be consolidated, if you can do so within the rules. You may also want to consider the timing of minimum distributions when deciding whether to consolidate. In general, there has to be a very good reason to consolidate anything if a penalty is involved. The returns must be large enough to surpass the penalties.
• Check Consolidation Rules – There are three paths to moving retirement accounts: rollovers, transfers, and cashing out. Transfers between traditional IRAs are generally allowed without limitations or penalties; transfers between 401(k) plans may be more problematic. Rollovers are switching to a different type of account, usually from a 401(k) to an IRA and done as a direct rollover to keep the funds tax-deferred. You cannot mix traditional tax-deferred IRA money with after-tax Roth IRA funds, but you can convert a traditional IRA into a Roth IRA. You will take an immediate tax hit, but you do not have to worry about minimum distributions with a Roth IRA. The closer you are to retirement, the less useful this strategy is – because you do not have enough time to recover from the tax losses.

Consolidating retirement accounts can be complex and full of potential penalties and tax implications if done incorrectly. It is wise to check with a professional financial advisor before consolidating your accounts – but if you choose not to, be sure to do your research, especially with respect to taxes and minimum distribution requirements.

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