Merge retirement accounts for cash and clout
By Karen M. Kroll • Bankrate.com
More than 50 percent of workers have two or more accounts, such as 401(k) and SEP (Simplified Employee Pension) IRA accounts, according to a recent report by American Express Financial Advisors. "The clutter can really accumulate over time," says Eric Tyson, author of "Investing for Dummies" and "Personal Finance for Dummies."
If you're among the multiple account holders, you're probably paying more in fees and dealing with more paperwork than you should be. More significantly, it's difficult to get a good grasp of your overall retirement savings.
To be sure, there's no magic number of accounts you should hold. However, every year or two you should review your accounts and see if it makes sense to consolidate them.
Consolidation offers several benefits:
Hanging on to a variety of accounts makes it more likely that you'll lose track of one -- along with the money in it. Or, the company overseeing an account may lose track of you. "Most of us aren't that good of record keepers," says Rick Meigs, president of 401khelpcenter.com.
Think you would never misplace an account? Think again. Meigs says he receives a half-dozen calls each week from people trying to track down old retirement accounts. With companies changing names, selling divisions and going bankrupt on a regular basis, it's easy for an account to get lost. "There is no national database (of accounts)," says Meigs. "You have to become a detective and track down where it's at."
Steps to consolidation
On the other hand, the companies you're leaving may charge fees to close your accounts. These can hit $100 or even more, says Parker. Keep tabs on the charges. It's possible that the firm you'll be retaining will agree to pick them up, if you ask. (Even if they won't, you'll still be eliminating the ongoing fees from the accounts you close.)
If you're leaving an employer and have a 401(k), you'll have the choice of moving the funds to a new 401(k) at your new employer (if it offers one that allows for rollovers) or opening up an individual retirement account and keeping your money there.
Each has pros and cons, says Meigs. You can borrow from your 401(k), but not from an IRA. However, it may be easier to withdraw the funds from an IRA. One more point to keep in mind: You'll probably have more control over your investment options if you go with an IRA. With a 401(k), an investment professional decides which options to offer.
Two may be better
Another reason to maintain separate accounts is when beneficiaries have very different needs and goals, says Julie Welch Runtz, CFP, CPA and director of tax services with Meara King & Co. in Kansas City, Mo. She gives this example: One of your children is doing fine, and doesn't really need the money. The other is disabled, and will depend on the money in the account to cover living expenses.
Given their different lifestyles, it may make sense to set up separate accounts. That way, the investment style for each account can be tailored to the beneficiary's needs.
Similarly, if you're planning to name both an individual and a charity as beneficiaries, you may want separate accounts. "When you co-mingle, the individual gives up the right to have the proceeds distributed over a lifetime," says Parker. Instead, he or she takes the money all at once.
There is a way around this: The two beneficiaries have until the year following the account holder's death to establish separate accounts. However, you may decide it's cleaner to establish separate accounts from the get-go.
Outside of these reasons, consolidating a grab-bag of retirement accounts typically makes sense.
"You need to be proactive, and take control of your retirement assets," says Meigs. "These are dollars you worked hard to save. You don't want to write them off by forgetting about them."
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