With job-hopping on the rise, it’s not uncommon for Americans to have multiple retirement accounts “floating” around. On top of employer-sponsored retirement plans such as 401(k)s and 403(b)s, many people own IRAs – Traditional and/or Roth. That’s a good thing, right? We’re always encouraged to save for retirement and now we have a variety of accounts to save in.
But is it a good idea to own multiple retirement accounts that are the same type?
Here are 2 reasons why owning multiple retirement accounts is not beneficial.
1. The annual contribution limit is just for one TYPE of account.
There is no limit on the number of retirement accounts you can own, but it will not increase the amount you can contribute into them each year. Here’s a list of the contribution limits for each retirement account.
The IRS sets a specific annual dollar amount you can put into your retirement accounts. Don’t think that you can put in $6,000 into 10 different Roth IRAs. Even if you own 10 of them, the IRS views all 10 as one account.
If you want to max out your IRA this year, there are endless ways to accomplish this. You can contribute $6,000 into one IRA, you can split the $6,000 evenly between a Traditional and Roth IRA, you can contribute $100 into each of your 60 IRAs, and so on. How you split the $6,000 is of no concern to the IRS, but it’s when you exceed the contribution limit that you’ll be slapped with a penalty.
With these restrictions in place, does it really make sense to have multiple of the same type of account?
2. It becomes difficult to manage the investments for your retirement plan.
Imagine having 10 IRAs and you want to rebalance your portfolio. I have seen clients with 3-5 IRAs held at different financial institutions. It was a nightmare every time they had to rebalance their portfolios because they would have to log-in to each account to place a buy or sell order.
Moreover, it became an extra pain during tax season to keep track of all the different tax forms for each account.
One of the very first things we often encourage our clients to do is to “tidy up” how they own their accounts. In other words, we encourage them to consolidate their retirement accounts that are of the same type.
Not only can this simplify the ongoing investment management of your overall retirement plan by providing a complete view of your portfolio, it can also reduce management fees and the time spent setting up and managing beneficiary designations.
If you decide to merge your retirement accounts, do so wisely. For example, 401(k)s and Traditional IRAs share the same tax characteristics since contributions made into either account are made with pre-tax dollars. This means you can rollover an old 401(k) into a Traditional IRA without any tax penalties and vice versa. However, if you rollover that 401(k) into an account that holds after-tax dollars, like a Roth IRA, you will be taxed on the money you roll over.
Here are some rules of thumb to consider when you consolidate and “tidy up” your retirement account ownership:
1. Make sure your accounts have the same tax characteristics.
Example: Rollover your traditional 401(k) from a former employer to your current 401(k) where you work. Make sure you’re not rolling a Roth 401(k) into a Traditional, and vice versa – these do not have the same tax characteristics.
2. Review the investment options and fees.
A 401(k) and IRA are just TYPES of accounts. The custodian is what you should pay attention to. Custodian is just a fancy word for the financial institution that provides the accounts. The most common 401(k) plans are with Fidelity, John Hancock, etc. Each financial institution and advisor on the account charges a different management fee, so read the fine print.
3. Keep a record of when and how much money you roll from one account to the other and whether it was made with pre or post-tax dollars.
This become crucial when you decide to withdraw the funds!
THE BOTTOM LINE:
There’s nothing wrong with keeping your retirement savings in multiple “buckets.” In fact, it’s encouraged that you have different accounts, such as a 401(k) and IRA, earmarked for retirement to maximize your savings. However, owning multiple of the same type of account isn’t necessary since it will not give you the flexibility to contribute more than the annual limit and it may complicate management of the investments inside your accounts – including transaction fees.
Make the management of your investments easier by consolidating your retirement accounts.