Long before music lovers could carry thousands of songs in their pocket or on their wrist, they were content to purchase records, cassette tapes, and compact discs.
Finding space for these hard copies usually wasn’t problematic early in life. The basement closet, bedroom shelf, or designer CD towers usually did the trick. But as time went by, collections grew larger and were subject to neglect. High school grads went off to college or moved out of mom and dad’s house, leaving some of their music inventory behind.
Out of sight (and sound), out of mind.
But for the nostalgic, getting those LPs, 45s, cassettes, and CDs back under one roof felt important.
Whatever happened to that “Purple Rain” album?Hey, I forgot about my Wayne Newton phase! Can you believe David Lee Roth covered the Beach Boys?
And for the industrious, burning the music to the computer and adding it to a digital library celebrated the past while providing control and easy access to huge archive of songs.
Unless you have rare, valuable versions of LPs by the Beatles, Bob Dylan, or Elvis, your music collection probably doesn’t have much impact on your retirement strategy. But it provides a relatable analogy when discussing various retirement assets that might be scattered across a string of former employers. Just as you’d consolidate your music, you can consolidate your money.
A Bureau of Labor Statistics study that tracked Baby Boomers from 1978 to 2012 found they changed jobs an average 11.7 times during that span. All generations are different, but even a conservative estimate of five or six job changes during a career could lead to multiple employer-sponsored retirement accounts.
Even in today’s online age, keeping track of a half-dozen retirement accounts can be cumbersome, prompting many to consider rolling those assets into their current employer’s retirement plan or consolidating multiple accounts into an individual retirement account (IRA).
So what’s right for you? It’s a question Transamerica retirement planning consultant Terry Colson tackles frequently when helping 401(k) plan participants. Like many financial questions, the answer is often vague: It depends.
“Is the IRA charging an administrative fee? What kinds of returns has each plan had? Does the person want more freedom in the investment options from which they can choose?” Colson said. “It’s important to present participants with a clear understanding of all of their available options, and have them decide which would be best for them based on their individual circumstances.”
The benefits of consolidation
Why do people alphabetize their music collection? In one word: simplicity (not to be confused with the multiplatinum Police album Synchronicity).
Consolidating multiple retirement accounts into an IRA or your current employer-sponsored plan can make it a lot easier to organize your retirement assets and assess how you’ll pay the bills when you stop working full time. Think of it as your retirement picture in HD.
We interrupt this blog post to remind you that you should review the fees and expenses you pay, including any charges associated with transferring your account, to see if consolidating your accounts could help reduce your costs. Be sure to consider whether such a transfer changes any features or benefits that may be important to you.
The consolidation argument also applies to your current workplace retirement plan. You’ll just need to confirm whether your employer accepts rollovers.
Back when record stores were still a thing (think Peaches, Sam Goody, and Tower Records), you could spend hours going through the inventory of vinyl, cassette tapes, and CDs. Mom-and-pop shops were also cool, but tended to have more limited selections.
If an abundance of investment options is important to you, compare the choices offered by your employer’s plan and those offered through an IRA rollover. In general, IRAs provide more options, but some retirement plans offer access to hundreds of investment selections.
Key thing to remember: More doesn’t always mean better. Heck, the Canadian heavy metal band Anvil has produced 17 studio albums.
Costs and fees
This one’s a biggie. Depending on the size of your employer, your 401(k) fees might be lower than an IRA because larger companies and organizations have more leverage when negotiating costs with plan providers.
Mindful of lawsuits over high fees, many employer-sponsored plans offer low-cost options, including index funds and exchange-traded funds commonly found in an IRA.
Employer-sponsored plans also may offer stable-value funds not available outside a workplace retirement plan.
Protection from litigation
We’re in no way suggesting you’ll be the target of a lawsuit, but … assets in a 401(k) or other employer-sponsored retirement plans are off limits if you’re sued for damages. IRAs generally have similar protection, but the specifics vary from state to state.
In bankruptcy cases, creditors cannot access to your 401(k) assets, while IRAs are protected up to $1.28 million.
The RMD conundrum
When you turn 70½, the IRS wishes you a happy half-birthday by requiring you to start taking required minimum distributions (RMDs) from your tax-deferred retirement accounts. Traditional IRAs and employer-sponsored plans are subject to RMDs, but workplace plans offer an exception.
RMDs from a 401(k) can be delayed if you’re still employed at 70½ and contributing to your retirement plan at work. This exception only applies to your current employer’s plan, and as long as you don’t own 5% or more of the business.
The annual RMD is determined by an IRS chart. Check out our RMD cheat sheet for more information.
Access to loans
Borrowing from your retirement accounts is highly discouraged, but … sometimes there’s no other option in times of crisis.
Many 401(k) providers allow plan participants to borrow up to $50,000 from their account, while IRAs do not have a loan provision. IRAs, however, allow early distributions for first-time homebuyers, higher education expenses, and other exceptions. Keep in mind those distributions are taxable as ordinary income.
For detailed rules about loans from retirement accounts, check out a helpful FAQ page from the IRS. (Yes, helpful and IRS can be used in the same sentence.)
Sammy Hagar couldn’t drive 55, but he would’ve been able to access his 401(k) assets without penalty if he was fired, laid off, or quit his job during the year he turned 55.
If Sammy was resigned to contributing to an IRA, he wouldn’t be able to take distributions until age 59½. Anything taken prior to 59½ would be taxed as ordinary income and subject to an additional 10% penalty.
Don’t forget the beneficiaries
Whether you consolidate assets or continue to maintain multiple retirement accounts, it’s important to review your beneficiary designations. The person you named on your 401(k) five years ago might not be the same person you want as the beneficiary today.
And if you don’t have a beneficiary named on your retirement accounts, it could cost time and money for your heirs down the road. While a will is a great estate-planning tool, it doesn’t cover retirement assets. The Transamerica Advanced Markets Group created a beneficiary review worksheet that can help.
Things to Consider:
- If you’ve changed jobs several times throughout your career, take stock of your retirement accounts to see how combining them might make it easier to create a retirement strategy.
- Traditional IRAs and 401(k)s offer different benefits and provisions. Compare both to see what might be more appealing to your unique situation.
- When in doubt, consider talking to a financial professional who can help you make the decision that’s right for you.
Neither Transamerica nor its agents or representatives may provide tax, investment or legal advice. Anyone to whom this material is promoted, marketed, or recommended should consult with and rely on their own independent tax and legal advisors and financial professional regarding their particular situation and the concepts presented herein.