Why Should I Consolidate My 401(K)?
You’ve been working and saving up for retirement, paying faithfully into that 401K each pay period. But what thought have you given to the 401K accounts from previous employers?
Typically when leaving a job, few Americans think about what to do with their 401K and other retirement or investment accounts. In most cases, you have the option of leaving your 401K in the company account, rolling 90 percent of it over into an IRA or other investment account or cashing it in at a substantial penalty. Rarely do we think there are other more practical options to maximize our savings and plan for the future, but there are. Doing so may be beneficial in that it makes looking after your savings much easier says Ann Dowd, CFP®, Vice President at Fidelity.
“Managing your financial life takes time, but adding the complexity of planning across multiple providers can make it more time-consuming. Why make it hard on yourself to get a complete view of your cash flow, financial needs, and investments?” To take the drudgery out of managing multiple 401K accounts across employers, smart investors should look to consolidating their 401K’s.
According to Fidelity, there are four reasons why consolidation should be considered:
1. Consolidation offers a complete view of investments
Consolidation makes it easier for consumers to take control of their portfolio and achieve their goals much faster. Consolidation allows consumers a way of tracking their accounts o avoid duplicate investments types and leave room for developing a more diverse portfolio and minimize risk altogether.
2. With consolidation, consumers can better track tax opportunities
When your accounts are held by one provider, you can reduce the losses and see your tax gains much easier and this makes for a cleaner investment strategy in the long run. Tax-efficient investments can be in one account whereas you can keep less tax-efficient assets an IRA or other tax-advantaged accounts.
3. Consolidation reduces fees and commissions
Investing through multiple providers means you are paying fees and commissions to each, meaning more money is going into their pockets and less into your savings. Financial providers have “thresholds” for fees and commissions. The more providers you work with, the more thresholds you will come across and the more fees and commissions you will pay. You can reduce or eliminate these by limiting the number of providers managing your accounts. Fidelity advises that you check with your provider as this may not always be the case.
4. Consolidation allows for more effective planning
Says Dowd, “Planning across multiple providers can make it harder to get a realistic view of your cash flow, needs, and progress. Being able to speak with one company about all your savings can make it easier.” Consolidating helps retirees plan how much to withdraw each year so their savings will last their lifetimes and ensures they are able to meet the required minimum distributions (RMDs) required at age 70½.
Consumers, however, should be smart about consolidation and take their time deciding if this is the route they want to go. In order to determine if consolidating your 401K accounts is right for you, seek the advice of a financial planner like Altair Gobo, Altair M. Gobo, CFP®, a partner at U.S. Financial Services, LLC, Fairfield, New Jersey and author of the book Getting To The Green: Golf, Financial Planning, and Life, Not Necessarily in That Order (See this interview with Gobo on financial planning and how easy and affordable it is).
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About the Author: Aisha K. Staggers is a writer, lecturer, and co-host and producer of “All Our Own” radio show and podcast and co-host of “Staggers State of Things” on the Dr. Vibe Show. Her work has been featured on MTV News, HuffPost, Blavity, Atlanta Blackstar, For Harriet, New York Review of Books and a host of other first-run publications and syndicated outlets. Find her on Twitter @AishaStaggers. For more of her work, check out her page here!