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Combining 401(k) accounts can simplify your life and even help optimize your investment strategy.
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Knowing where you hold your retirement funds and the types of accounts you have is helpful.
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Knowing where your money sits can lead to more informed decisions as you save for retirement.
Many Americans find themselves juggling various retirement plans resulting from various jobs. While you may feel secure knowing you have multiple investments, managing different 401(k)s can be overwhelming. Thankfully, combining 401(k) accounts can simplify your life and even help optimize your investment strategy.
How to consolidate your 401(k) accounts
If you wonder, “Should I combine my 401(k) accounts,” the answer might be yes. To combine 401(k) accounts is about more than tidiness; it is about managing a coherent strategy for your future.
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1. Keep track of all your retirement savings accounts
Before you consider how to combine 401(k) accounts, knowing where you hold your retirement funds and the types of accounts you have is helpful. You can begin this process by compiling a detailed list of all your 401(k) and other retirement accounts, including those from any previous employer. Gathering this information can ensure a smoother consolidation process.
When your hard-earned money is out of sight or scattered across numerous accounts, you will more likely neglect managing the multiple accounts, making it possible to miss out on compounded returns over time. Knowing where your money sits can lead to more informed decisions as you save for retirement.
2. Consolidate your retirement accounts
Now that you understand your accounts, you may wonder how to combine 401(k) accounts effectively. To consolidate 401(k) accounts, moving each plan strategically to avoid taxes and penalties is important. For a traditional 401(k), you can execute a rollover, combining 401(k) accounts into your current 401(k) or a traditional IRA. You can only merge a Roth 401(k) into a Roth IRA, though.
Begin by opening an account with your desired bank or brokerage, then contact your previous 401(k) administrator to initiate a direct rollover. If the transfer is digital, confirm the deposit into your new account. If it is via check, complete the funds transfer within 60 days to sidestep taxes and penalties. The transfer procedure can differ across plan types, so a financial professional's guidance can be invaluable as you determine how to merge 401(k) accounts.
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3. Adjust your investments and allocations
Consolidating 401(k) accounts is the perfect opportunity to reassess your account holdings and investment strategy. Your financial situation and risk tolerance evolve, so it is wise to review your investment mix to ensure it aligns with your current financial goals. For example, you may reduce your allocation to assets such as stocks if you are closer to retirement or have a lower willingness or ability to take on risk. If you are uncertain about developing your investment strategy, you can consult a financial advisor for insight into how different investments can address your needs and risk tolerance.
4. Calculate your total savings
You can determine your net worth quite quickly once you combine 401(k) accounts. Your total savings amount is more than just a number; it is a metric that can help gauge whether you are on the right track for retirement. If your account value falls short, you can adjust your contributions to boost your savings.
To calculate the size of your nest egg, add up the balances of your newly consolidated accounts. The resulting value represents your retirement savings. For example, if you have consolidated three 401(k) accounts with balances of $50,000, $20,000, and $30,000, your total retirement savings would now be $100,000 ($50,000 + $20,000 + $30,000).
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Conclusion
Retirement planning can be overwhelming at the best of times, let alone when you have multiple accounts. To simplify account management and potentially decrease investment fees, consider combining 401(k) accounts with four simple steps. By understanding your retirement accounts, consolidating plans, adjusting investments, and evaluating your savings, you are taking charge of your retirement and helping make your dreams a reality.
FAQ
Should I combine my 401(k) retirement accounts?
Combining 401(k) accounts can be a strategic move as it can offer potentially lower fees and less complicated account management. However, individual circumstances vary, so it can be helpful to consider your personal situation, weighing factors such as investment options and their costs before deciding.
What types of retirement accounts can I consolidate?
Typically, you can consolidate 401(k)s from past employers and traditional IRAs into a single 401(k) plan. You can also combine multiple Roth IRAs into one account. Before making any changes, it is important to determine which types of accounts you have and if there are any tax implications to be aware of.
Can spouses combine retirement accounts?
Spouses cannot merge their retirement accounts together as each account links to a specific Social Security number. You can name your spouse as a beneficiary, though. This means your account transfers into the beneficiary’s retirement account upon your death.
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Lauren has over a decade of experience in wealth management and financial planning. She is a CFA charterholder and holds a Bachelor's degree in Finance. Lauren has worked with several asset management firms, offering wealth advisory and portfolio management services to high-net-worth clients.
