Consolidate Retirement Accounts To Simplify Your Financial Life

By: Andy Hoffman, CTFA, CFP®, Private Client Advisor
June 21, 2021

Whether you’re already in retirement or getting very close to it, you may have realized how confusing it can be to keep track of the amount of money and types of investments you have in multiple retirement accounts.

Consolidate Retirement
Perhaps you have a retirement account funded with pre-tax money: an IRA (individual retirement account), 401(k), 403(b), 457 plan, SIMPLE IRA, SEP IRA, or Keogh. Maybe you have an employer pension plan, Roth IRA, or Roth 401(k) — the Roth accounts are funded with after-tax money.

With all these options, it’s no wonder many Americans open new retirement accounts when they change jobs or experience significant life events, set their savings plans on auto pilot, and note the date on the calendar when it’s time to start withdrawing funds. They tend to procrastinate transferring or consolidating their assets along the way, juggling a number of retirement accounts during their working years and into retirement. Sound familiar?

If so, it might be time to simplify your financial life and consolidate all of your retirement plans into one — perhaps an IRA that offers a variety of investment choices and tax advantages.*

IRAs Role in Retirement

Let’s consider three reasons why account consolidation might make sense for your financial situation.

HELPS COORDINATE YOUR INVESTMENT STRATEGY
At first glance, having too many retirement accounts may not seem like a problem. All the accounts are helping you move toward a common goal: saving enough money to get you through your retirement years.

But keeping a watchful eye on multiple retirement accounts over a long period of time can be tricky, even in today’s digital world. It’s harder to concentrate on an investment strategy and track your progress toward your goals when you have to visit a number of websites to monitor your holdings and ensure your assets are properly diversified.

With multiple accounts, you may hold a concentrated position without even realizing it.
Let’s say you selected an aggressive equity portfolio when you enrolled in your first 401(k) at the start of your career.

Ten years later, you changed jobs, enrolled in another 401(k), and selected a conservative investment profile because your goals and risk tolerance have changed. As times passes, just because this account is invested conservatively, it doesn’t mean your overall allocation is necessarily in line with your goals. Unless you also reallocated your original 401(k), your overall allocation may be more aggressive than you think. A financial advisor can help you consolidate your accounts and coordinate an appropriate level of diversification, thus making it easier to align or adjust your asset allocation to ensure you stay on target with your goals.

EASIER TO MONITOR YOUR REQUIRED MINIMUM DISTRIBUTIONS (RMDs)
If you participate in a retirement plan or own an IRA, including a SEP IRA or a SIMPLE IRA, you are responsible for taking the correct amount of RMDs on time each year from your retirement account – and face stiff penalties for not doing so.

According to current IRS rules, you must withdraw RMDs annually starting with the year you reach age 70-1/2 (if you reached that age before January 1, 2020). However, with the passage of the SECURE Act in 2019, if you reached age 70-1/2 in 2020 or later, you don’t have to take your first RMD until April 1 following the year you turn 72. For all subsequent years, including the year you were paid your first RMD by April 1, you must take your RMD by December 31.²

The RMD rules apply to all employer sponsored retirement plans, including profit sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. The RMD rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs, as well as to Roth 401(k) accounts. However, the RMD rules do not apply to Roth IRAs while the owner is living.²

If you have multiple plans and you reach the age when required minimum distributions begin, you can see how it might be easy to miss or overlook a distribution from one or more of your accounts. If you fail to withdraw your RMD, fail to withdraw the full amount of the RMD, or fail to withdraw the RMD by the applicable deadline, the amount not withdrawn is subject to a 50% penalty. Working with a financial advisor to consolidate your various retirement plans into one account can help you avoid this costly tax mistake.

REGULAR REVIEWS OF YOUR BENEFICIARY DESIGNATIONS

Whenever you enroll in an employer retirement plan, you designate beneficiaries on your account. But when was the last time you reviewed or updated your designations? Plans from previous employers — or a current employer, for that matter – may have beneficiaries listed who no longer align or fit with your estate planning wishes.

Reviewing and updating beneficiaries on a single account makes life so much simpler.

HERE’S AN EVEN BETTER REASON.
When the SECURE Act was passed in 2019, new rules were put in place for how beneficiaries inherit these assets.

Improperly naming a beneficiary can have serious income tax implications. For this reason, everyone should review their beneficiary designations and check with their tax professional and financial advisor to see if any other changes should be made. The laws have changed considerably over the years. While your account document(s) may succeed passing along the assets to your designated beneficiaries, your advisors can help ensure they don’t incur unwanted tax consequences or unnecessary restrictions.

IS CONSOLIDATION THE RIGHT MOVE FOR YOU?
Many factors help to determine whether combining all your retirement plans into one account makes sense for your unique financial situation. Contact Commerce Trust Company today — we can review your retirement accounts and help you decide if consolidation is the best financial move for your retirement and estate planning strategies.

* Consult your tax advisor
¹ Source: Fidelity® Q4 2020 Retirement Analysis: Despite Ongoing Economic Uncertainty as a Result of the Pandemic, Contributions to Retirement Accounts
Remained Strong, Helping Boost Account Balances to Record Levels by Fidelity Investments February 18, 2021 https://www.yahoo.com/lifestyle/fidelity-q4-2020-retirement-analysis-134500181.html
² Source: Internal Revenue Service, “Retirement Plan and IRA Required Minimum Distributions FAQs,” https://www.irs.gov/retirement-plans/retirement-plans-faqsregarding-required-minimum-distributions. Page last reviewed or updated: 26-March-2021.

The opinions and other information in the commentary are provided as of June 22, 2021. This summary is intended to provide general information only, and may be of value to the reader and audience.

This material is not a recommendation of any particular investment or insurance strategy, is not based on any particular financial situation or need, and is not intended to replace the advice of a qualified tax advisor or investment professional. While Commerce may provide information or express opinions from time to time, such information or opinions are subject to change, are not offered as professional tax, insurance or legal advice, and may not be relied on as such.

Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Diversification does not guarantee a profit or protect against all risk.

Commerce Trust Company is a division of Commerce Bank.

NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE

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ABOUT THE AUTHOR

Andy Hoffman, CFP® Trust Officer, Private Client Advisor Commerce Trust Company
Andy is a private client advisor for Commerce Trust Company. He serves as a consultant and relationship manager providing clients with personalized objective advice and oversight across all of our services, including trust administration, financial advisory services, private banking, and investment management.

Andy facilitates all aspects of relationship management for the client team, including administering complex trusts, maintaining client communication, and coordinating with internal and external partners to deliver a superior client experience. He joined Commerce in 2016 with ten years of industry experience.

Andy received his Bachelor of Science degree in finance/economics and Master in Business Administration with a concentration in finance from Rockhurst University. He has achieved the designations of Certified Trust and Financial Advisor and CERTIFIED FINANCIAL PLANNER™. Andy is a member of St. Ambrose Catholic Church and the Crusaders Club at St. Ambrose. He enjoys spending time with his wife Megan, daughter, Maggie, and two dogs, Mia and Bowser. He also enjoys watching the Blues, Cardinals, and Illinois basketball and football.