Consolidating 401ks and IRAs: The Potential Benefits and Cons


The job market in recent years has been unlike anything we’ve seen in the past. The pandemic response changed the way we work and where, and these ongoing effects are being seen in the data.

Zippia37% of U.S. workers lost or changed jobs in 2020. The average tenure of a single employer is only 4.1 years. 65% of American workers actively search for new full-time work.

Clearly our generation doesn’t stick with one employer for life and retire with a pension the way our parents and grandparents might have.

If you have had multiple jobs in your career, it is likely that you have retirement savings with several banks and investment firms. But if you have multiple 401(k)s and IRAs scattered throughout your employment history, there’s a surprising reason you should be consolidating—you could be leaving money behind.

According to the Government Accountability Office—which analyzed data between 2004 and 2013—approximately 25 million Americans left behind money in a 401(k) account after leaving a job. This means that 37% of all workers are saving money through their workplace. According to the figures of the labor department.

Employers are enrolling more workers into 401(k), plans. Some may not even realize they’ve been enrolled. This makes it more likely that employees will forget about their retirement accounts when they move jobs.

RELATED: Where are you at? The Average Retirement Savings Based on Age

If you don’t leave updated contact information with your former employer, you probably aren’t going to receive any updates or information about that retirement plan or your account. What’s more, current law allows businesses to move old accounts with a balance under $5,000 out of their plan, making it even easier to lose track of your money.

“From a consumer perspective, the default should be 100% of the time to move your money [when changing jobs],”Spencer Williams, President and CEO of Retirement Clearinghouse said CNBC.

Consolidating accounts can bring you many benefits

Consolidating your retirement accounts can have many benefits, but these are the top.

1. It’s Easier To Keep Track Of Your Money

It is futile to try to track multiple accounts that are linked to different employers. When you consolidate everything into one account, it’s easier to track your progress toward your savings and investment goals and manage your options. It is ideal to have one statement, one number and one password so that nothing slips through the cracks.

2. Lower Fees

Retirement plans often have investment, custodial and administrative fees. Therefore, fewer accounts should mean fewer fees—which could mean much better growth for your money.

A few fees are based even on the assets you have. You may be eligible for a fee reduction if you combine your accounts. Your total balance could meet minimum asset thresholds if you combine them.

3. It simplifies things for your beneficiaries

When you die, retirement accounts often go unclaimed. This can cause problems for loved ones who manage your estate. Consolidating accounts will make it simpler to coordinate payments for your heirs without the need to contact multiple custodians and track down multiple statements.

4. Reduce your risk of missing required minimum distributions

The IRS requires you to take a minimum distribution from your retirement accounts—known as an RMD—when you turn 72. If you don’t, there is a heavy penalty equal to 50% of the amount you don’t withdraw. Multiple accounts can lead to multiple RMDs, which increases the chance of making costly mistakes.

RELATED: The Truth About A 401(k), To Retire With Success

The Cons of Consolidating Accounts

Consolidating retirement funds might not be the right choice for everyone. It can limit your investment options, as well as your flexibility. There could be fees if you transfer your money to another investment.

You might not want to reduce your investment portfolio to just one account. Depending upon the frequency and amount of your contributions, you may want at least one 401k and one IRA.

What is the best thing to do for your retirement?

Financial planning is very personal because everyone has different financial goals and needs. When planning for retirement, it is important to establish a monthly budget. Talk with your spouse and family. It’s also a good idea to consult a professional so you can be informed of your different investment options and receive guidance when weighing your choices.

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