Individual retirement accounts (IRAs) are the foundation of most individuals’ retirement nest eggs. Unlike 401(k) accounts, which need to be sponsored by your employer and which may not provide you with a full range of investment options, IRAs are almost entirely within your control.
Because it’s so easy to open multiple IRAs, we can sometimes find ourselves with a number of different accounts. But it can be difficult to manage too many accounts effectively. In addition, we might not be able to make some of the larger investments we’d like when our savings are spread across a large number of smaller balance accounts. Consolidating your accounts can solve these issues.
Here are some tips for making sure that you obtain the greatest benefit out of consolidating your IRAs.
Identify Your Destination IRA. In order to consolidate multiple IRAs, you’ll need an account to consolidate them into. This can be one of your existing accounts, or an entirely new account. In order to determine the best destination account, consider any annual fees that may be charged for the account, as well as the applicable transaction fees. Make sure that the transactional fees are not just the lowest overall fee structure, but the lowest for the type of investing that you do. For example, low rates for trading stock options won’t be particularly valuable to you if you invest your retirement savings primarily in mutual funds.
Understand the Timeframe of the Rollover. Rolling over multiple IRAs can take time, and different custodians have different schedules for accomplishing a rollover. You’ll want to know this information for several reasons. First of all, if you’re depending on the income from your portfolio to cover any of your current expenses, you want to be confident that you’ll have access to those funds when you need them. Second, if you are an active trader then you don’t want to miss any key trading opportunities.
Consider Roth and Traditional IRAs. If you have Roth and Traditional IRAs, you’ll either need to come up with a consolidation plan for each account type or make sure you understand the tax implications of conversion. Converting a traditional IRA into a Roth IRA can trigger a significant current tax bill, and you want to make sure that the long term benefits outweigh that current tax hit.
Consider Account Termination Fees. Some IRA custodians charge a fee when you terminate an account. While you may be willing to pay a termination fee in order to reap the benefits of only having a single account, make sure you understand those fees before you start the process.
Finally, it’s absolutely essential that you set up your account consolidations as direct rollovers. While you’re permitted to liquidate an IRA and receive a check for your account balance, then re-deposit that check into a new IRA within 60 days, relying on this method for a rollover can be risky. If you miss the deadline by even a single day, then you’ll face early withdrawal penalties and taxes on the entire amount.
Individual retirement accounts (IRAs) are the foundation of most individuals’ retirement nest eggs. Unlike 401(k) accounts, which need to be sponsored by your employer and which may not provide you with a full range of investment options, IRAs are almost entirely within your control.
