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What you should know about consolidating retirement accounts

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The U.S. Bureau of Labor Statistics recently stated that the average American worker will have upwards of 10 jobs on their resume by the time they reach 40. That includes three to seven career changes over a lifetime. As such, it’s not a surprise that many people have multiple retirement accounts from a variety of former employers.

If this sounds familiar, you might be wondering if you should consolidate those accounts or if there's a benefit to keeping them separate. The first place to start is to understand which type of retirement accounts you have, as your options for consolidation may vary.

Types of retirement plans
Your plan options may include a Traditional or Roth IRA, 401(k), 403(b), 457 Plan, SIMPLE IRA, or SEP IRA. Each one has its advantages for specific individuals and families. 

  • Traditional IRAs allow you to deduct your contributions from your taxable income now and pay taxes on the withdrawals during retirement when your income and tax liability may be lower.
  • Roth IRAs are funded with after-tax contributions. This means your withdrawals in retirement are tax-free.
  • 401(k) Plans are typically funded from your employer paycheck. You receive tax deferment on contributions that are then paid in retirement. Additionally, some employers have matching fund opportunities.
  • 403(b) Plans are employer-sponsored and often utilized by non-profit institu1tions. Contributions are not subject to taxes until retirement.
  • 457 Plans offer tax deferment on contributions that are then paid in retirement. These plans may be utilized by state and local governments for their employees.
  • SIMPLE (Savings Income Match Plan for Employees) IRAs are often used by companies with less than 100 employees.
  • SEP (Simplified Employee Pension) IRAs are perfect for small businesses and sole proprietorships where the employer makes contributions on behalf of the employee.

Tax considerations
The accounts you fund can have a direct and indirect impact on your taxes. For example, funds that allow for pre-tax contributions are simply deferring taxation until retirement. If you are considering transferring funds from one retirement plan to another, it’s important to note that funds in a tax-deferred account cannot be moved to or from a tax-exempt account without incurring fees and penalties.1

How to consolidate (or rollover) a 401(k)
If you’ve been re-employed, you are allowed to roll everything over to your new employer’s plan. Otherwise, you can leave the funds where they are, move everything to your own IRA, or cash it out with the understanding that you will face some stiff tax penalties.

To consolidate your 401(k), make sure you have login access to your current plan. Next, decide where you want the money to go, whether that's a brokerage, bank, credit union or new employer plan. If you want to control the funds, open your own qualified account. First, contact the company where your funds were previously held and request the funds be transferred to your new plan. The new institution might require the check be specifically drawn up with your IRA account number or that the funds be directly deposited into the account. If you receive the funds, you'll have 60 days to make the full contribution. If you miss that 60-day deadline, the funds will become fully taxable at a very high rate.

Get help from the pros
The Financial Advisors at Addison Avenue Investment Services, a division of First Tech, can help you plan ahead, whether you’re facing early retirement, an unexpected job change, career advancement, or other changes to your employment.

 

Registered address: 1011 Sunset Blvd, Rocklin, CA 95765 │ 855.744.8585


Financial Advisors offer securities through Raymond James Financial Services, Inc. Member FINRA/SIPC and securities are not insured by credit union insurance, the NCUA or any other government agency, are not deposits or obligations of the credit union, are not guaranteed by the credit union, and are subject to risks, including the possible loss of principal. First Tech Federal Credit Union and Addison Avenue Investment Services are not registered broker/dealers and are independent of Raymond James Financial Services. Investment advisory services offered through Raymond James Financial Services Advisors, Inc.


Matching contributions from your employer may be subject to a vesting schedule. Please consult with your Financial Advisor for more information.


Contributions to a Traditional IRA may be tax-deductible depending on the taxpayer's income, tax-filing status, and other factors. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.


Like Traditional IRAs, contribution limits apply to Roth IRAs. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free.


401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.


While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax matters. You should discuss tax matters with the appropriate professional.

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