Earning more money is the primary goal of most Americans—and in the past few years, they've found that changing jobs is the fastest way to do so. Gone is the era of 20 years at the same company with a gold watch at retirement. The average American stays at a job for 4.1 years, according to the U.S. Bureau of Labor Statistics.
Though job changes can lead to more money—one in five employees received a 10% to 20% bump in compensation when switching jobs—it can also mean workers have multiple 401(k) retirement accounts from past employers. Having multiple accounts isn't inherently wrong, but it can cost you time and money in the long run. Let's break down the reasons you might want to consolidate those accounts.
- When you leave a job, you must decide whether to leave your retirement contributions in your old 401(k) or roll them over into your next job's plan or an IRA.
- Rolling over funds can save time managing your account as well as administration fees from multiple accounts.
- Consolidating accounts makes it easier for your beneficiaries to direct your estate after your passing.
- Your account balance is one factor to consider. Balances under $5,000 can be automatically rolled over to an IRA of your former employer's choosing.
Pros of Consolidating Accounts
There are three main reasons to consolidate your accounts: lower fees, less legwork, and it's easier for your beneficiaries.
- Fewer fees. Retirement accounts often come with management fees such as annual fees or fees for paper statements, etc. If your account balance is small because you weren't at a company for long or weren't investing heavily at the time, those innocuous account fees can quickly eat into your balances. By consolidating your smaller balances into one individual retirement account (IRA) or rolling past accounts into your current 401(k), you'll only be subject to one set of fees.
- Less maintenance. If you've changed jobs three or four times, you may have three or more accounts to monitor. Keeping an eye on all those separate accounts is time you could spend doing something else, like enjoying your life. Plus, at age 72, you must start making required minimum distributions (RMDs) from traditional IRAs and 401(k)s. Keeping all your money together means you'll only have to take one RMD rather than several, allowing you to save your invested money for a longer period.
- Streamlined for beneficiaries. If you die, your retirement accounts will pass on to your beneficiaries. If you have several smaller accounts, your heirs might find it laborious to track down and manage each account. One account allows them to easily see what is in your estate and when and how it should be distributed.
Of course, if you are satisfied with a former employer's plan, you're under no obligation to move your money if the amount is more than $5,000. Just beware the inactivity can result in escheatment, or turning over old accounts to the state as unclaimed funds. If you don't contribute or withdraw anything from your accounts for a time defined by your state (typically five years), your account may be considered abandoned and held in your state's unclaimed funds department. You can still claim those funds, but the IRS may consider that a taxable distribution if you withdraw them, which can incur penalties and fees.
Finding Old Accounts
It's relatively easy to start consolidating accounts if you wish to do so. First, you'll have to identify where your accounts are. If you have statements from your old accounts, contact the plan administrator to begin the rollover process.
If you're not sure where your accounts are, you can do one of three things:
- Contact your former employer. Your benefits manager or human resources director should be able to connect you with the plan administrator.
- Consult the Internet. Several sites can help you search, including MissingMoney.com and Unclaimed.org. These sites will help direct you to your state's unclaimed property divisions, where you can search your name, address, and Social Security number. This will only work for accounts that have been turned over to the state divisions.
- Contact the U.S. Department of Labor (DOL). Every company that provides a 401(k) plan has to register with the DOL using a Form 5500. You can search for your company by year to find out who administered their plan.
How to Consolidate Your Accounts
When you've found your accounts, you need to determine how you can consolidate them. The IRS offers information about which types of accounts are compatible for rollovers. Because of tax implications, not all accounts are compatible.
When you've decided what type of account to roll your current investments into, pick a financial organization, whether it's a bank, brokerage, or online investing platform. Open a new IRA with them. You can then decide whether to do a direct or indirect rollover.
A direct rollover transfers funds from one investment account to another. The transfer will take place electronically, or your former plan administrator will write a check for the amount in your account balance and send it to the new IRA.
An indirect rollover is when you withdraw the funds from your account in cash and then redeposit them to the new account within 60 days. Indirect rollovers are riskier because if you miscalculate your 60-day period, you may be hit by early withdrawal penalties and taxes.
Should I Leave My Accounts With a Former Employer?
Not all investment accounts are created equal. If your former employer's 401(k) was performing exceptionally well, there's no reason to pull your money out just because you don't work there anymore. Be aware that your options will be more limited. You can't continue funding the account, and loans are unlikely to remain available after you've left the company.
Do I Have to Take RMDs at 72?
Yes. If you have a traditional 401(k) account or a Roth 401(k), you must take RMDs. On the other hand, Roth IRAs don't require these distributions. If your employer offers a Roth option and you don't anticipate needing the money at age 72, this may be a good choice.
Is There a Limit to How Many Retirement Accounts I Can Have?
No. Although you can have multiple IRAs, 401(k)s, and other retirement accounts, the limits on how much you can contribute during a tax year stay the same. It's cumulative, not per account. With more accounts, this may become confusing, so keep careful track of where your investment dollars are going.
The Bottom Line
Changing jobs for a better salary or position is a good career move. Though there's nothing wrong with having multiple accounts from different employers, consolidating can save you time and money and increase your peace of mind. When you leave a job, be intentional with your decisions. Your former employer may funnel your holdings into an IRA of their choosing if they don't hear from you in a specified amount of time and your account balance is less than $5,000.