Should You Consolidate Your Retirement Accounts?

As you progress through your career, you may accumulate multiple retirement accounts from different employers, including 401(k) plans, IRAs or other investment vehicles. As a result, you may end up wondering if you should consolidate your retirement accounts. Retirement account consolidation can simplify portfolio management, potentially reduce fees and provide a clearer financial picture. However, whether it makes sense ultimately depends on your individual circumstances and preferences.

A financial advisor can help you assess whether consolidating your retirement accounts aligns with your overall retirement strategy.

What to Consider Before Consolidating Retirement Accounts

Deciding whether to consolidate your retirement accounts involves evaluating several factors, including ease of management, investment flexibility, fees and tax implications. Here’s a breakdown of four factors.

Account Fees and Costs

One of the main reasons people consolidate retirement accounts is to reduce fees. Different retirement accounts charge varying administrative and management fees, which can eat into your returns over time.

If you have older 401(k) accounts with high fees, rolling them into a lower cost IRA may save you money. On the other hand, some employer-sponsored plans offer lower fees than IRAs, so compare costs before making a move.

Required Minimum Distributions (RMDs)

Once you reach age 73, the IRS requires you to take required minimum distributions (RMDs) from traditional retirement accounts. Keeping multiple accounts may complicate tracking and calculating RMDs, making consolidation beneficial for easier management. However, some employer plans offer deferred RMDs if you’re still working, so consolidating into an IRA may not always be advantageous.

Discover how much you’ll need to take from your IRA or 401(k) with our RMD tool.

Required Minimum Distribution (RMD) Calculator

Estimate your next RMD using your age, balance and expected returns.

Quickly estimate your RMDs and when to take them

RMD Amount for IRA(s)

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RMD Amount for 401(k) #1

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RMD Amount for 401(k) #2

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About This Calculator

This calculator estimates RMDs by dividing the user's prior year's Dec. 31 account balance by the IRS Distribution Period based on their age. Users can enter their birth year, prior-year balances and an expected annual return to estimate the timing and amount of future RMDs.

For IRAs (excluding Roth IRAs), users may combine balances and take the total RMD from one or more accounts. For 401(k)s and similar workplace plans*, RMDs must be calculated and taken separately from each account, so balances should be entered individually.

^*The IRS allows those with multiple 403(b) accounts to aggregate their balances and split their RMDs across these accounts.

Assumptions

This calculator assumes users have an RMD age of either 73 or 75. Users born between 1951 and 1959 are required to take their first RMD by April 1 of the year following their 73rd birthday. Users born in 1960 and later must take their first RMD by April 1 of the year following their 75th birthday.

This calculator uses the IRS Uniform Lifetime Table to estimate RMDs. This table generally applies to account owners age 73 or older whose spouse is either less than 10 years younger or not their sole primary beneficiary.

However, if a user's spouse is more than 10 years younger and is their sole primary beneficiary, the IRS Joint and Last Survivor Expectancy Table must be used instead. Likewise, if the user is the beneficiary of an inherited IRA or retirement account, RMDs must be calculated using the IRS Single Life Expectancy Table. In these cases, users will need to calculate their RMD manually or consult a finance professional.

For users already required to take an RMD for the current year, the calculator uses their account balance as of December 31 of the previous year to compute the RMD. For users who haven't yet reached RMD age, the calculator applies their expected annual rate of return to that same prior-year-end balance to project future balances, which are then used to estimate RMDs.

This RMD calculator uses the IRS Uniform Lifetime Table, but certain users may need to use a different IRS table depending on their beneficiary designation or marital status. It's the user's responsibility to confirm which table applies to their situation, and tables may be subject to change.

Actual results may vary based on individual circumstances, future account performance and changes in tax laws or IRS regulations. Estimates provided by this calculator do not guarantee future distribution amounts or account balances. Past performance is not indicative of future results.

SmartAsset.com does not provide legal, tax, accounting or financial advice (except for referring users to third-party advisers registered or chartered as fiduciaries ("Adviser(s)") with a regulatory body in the United States). Articles, opinions and tools are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual. Users should consult their accountant, tax advisor or legal professional to address their particular situation.

Investment Options

Investment flexibility is another key consideration. Employer-sponsored 401(k) plans may have limited investment choices, while IRAs typically offer a broader range of funds, stocks and bonds. If your current retirement plans restrict your investment strategy, consolidating into an IRA could provide more options.

However, some employer-sponsored plans offer exclusive institutional funds with lower costs than individual IRAs do. Reviewing the available investment choices in each account will help determine whether consolidation makes sense.

Tax Implications

The tax treatment of your retirement accounts is an essential factor in deciding whether to consolidate. If you transfer a traditional 401(k) into a traditional IRA, the move is typically tax-free. However, rolling a traditional 401(k) into a Roth IRA triggers a taxable event, requiring you to pay income taxes on the converted amount.

Additionally, some employer plans allow penalty-free withdrawals if you leave your job at age 55, whereas IRAs require you to wait until you are 59 ½. Consolidating could impact your ability to access funds early, so understanding the tax implications before making changes is crucial.

How to Consolidate Your Retirement Accounts

A woman researching how to consolidate her retirement accounts.

If you decide that consolidating your retirement accounts is the right move, following a structured process will help you make a smooth transition and avoid tax penalties:

Assess your current accounts. Start by gathering details about each retirement account, including balances, investment options, fees and employer-sponsored benefits. Determine whether any plans have unique features worth keeping, such as low-cost funds or penalty-free early withdrawals.
Choose the right account for consolidation. Decide whether to consolidate into an IRA or an active employer-sponsored plan based on fees, investment choices and withdrawal flexibility. For instance, if you are seeking greater investment flexibility, then you may consider an IRA.
Initiate a direct rollover. Contact the financial institutions managing your retirement accounts and request a direct rollover to avoid tax penalties. A direct rollover allows funds to move from one account to another without being taxed as a distribution.
Confirm the transfer and allocate investments. Once the funds are transferred, allocate your investments based on your risk tolerance and retirement timeline. Consider rebalancing your portfolio to align with your long-term financial goals.
Update beneficiaries and account details. Make sure that your new consolidated account has the correct beneficiary designations to reflect your estate planning wishes. Also review automatic contributions and withdrawals to maintain your retirement savings plan.
Monitor your retirement plan regularly. Periodically review your investment performance and adjust as needed to stay on track with your retirement goals. Working with a financial advisor can help optimize your retirement savings approach.

Tips for Consolidating Your Retirement Accounts

When consolidating retirement accounts, there are several important factors to keep in mind. Here are four general things that can help you make informed decisions and avoid costly mistakes:

Understand IRA contribution limits. Traditional and Roth IRAs offer valuable tax advantages, but it’s essential to know their contribution limits and eligibility requirements. Choosing the right IRA type—and knowing when to contribute—can significantly impact your retirement savings.
Consider creditor protection. Both employer-sponsored plans and IRAs provide safeguards against creditors, but the level of protection varies. Employer-sponsored plans, such as 401(k) plans, typically offer stronger federal protections under ERISA (Employee Retirement Income Security Act). IRAs also provide some creditor protection, but the extent depends on state laws. If safeguarding assets from potential creditors is a priority, it’s worth reviewing how your state treats IRA assets before consolidating.
Evaluate employer stock before rolling over. If you hold employer stock in a 401(k) or another workplace retirement plan, carefully assess the best approach before rolling those assets into an IRA. In some cases, using a net unrealized appreciation (NUA) strategy may offer significant tax advantages. This approach allows you to transfer employer stock to a taxable brokerage account rather than an IRA, potentially reducing long-term tax liability.
Be aware of the IRA’s one-rollover-per-year rule. When rolling over funds from one IRA to another, it’s important to follow the one-rollover-per-year rule to avoid unexpected tax consequences. This IRS rule limits individuals to one IRA-to-IRA rollover within a 12-month period, regardless of the number of IRAs they own. Direct trustee-to-trustee transfers between accounts do not count toward this limit, however, making them a preferable option for avoiding tax penalties.

Bottom Line

A woman reviewing her retirement accounts at home.

Consolidating retirement accounts can make management easier, lower fees and increase investment options, but it may not be right for everyone. Rolling multiple accounts into one IRA or 401(k) has benefits, but factors like employer plan perks, taxes, and required withdrawals should be considered.

Retirement Planning Tips

A financial advisor can help you evaluate your retirement plan options and how they fit into your overall financial goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Mandatory distributions from a tax-deferred retirement account can complicate your post-retirement tax planning. Use SmartAsset’s RMD calculator to see how much your required minimum distributions will be.