Why and How to Consolidate Multiple Retirement Accounts

The average job tenure in the U.S. is four years, meaning you've probably had more than a few jobs in your life and may even have several retirement accounts. If you've ever considered consolidating two or more retirement accounts into one, here's what you need to know.

Image source: Getty Images.

Will AI create the world's first trillionaire? Our team just released a report on the one little-known company, called an "Indispensable Monopoly" providing the critical technology Nvidia and Intel both need. Continue »

When consolidating accounts makes sense

Here's how to know it's time to consolidate:

You dread RMDs

A required minimum distribution (RMD) is the amount of money the government says you must withdraw from certain retirement accounts when you reach age 73 (or 75, if you were born in 1960 or later). By combining two or more retirement accounts into one, you only have to figure out how much your RMD is for that single account.

You wish you had a clearer overall picture

It's easy to lose sight of your overall financial situation when money is spread out in different accounts. Consolidating means viewing all your retirement funds in one place.

You want to save money

The process of consolidating accounts involves identifying which plans offer the best investment options and the lowest-cost funds. After all, if you're moving it all to a single account, you want that account to be the best available to you.

Before you consolidate

There are several steps to take before consolidating your retirement accounts. They include:

• Understand tax implications: Before you do anything, consult a financial or retirement advisor to determine whether consolidating will have any tax consequences.
• Learn about penalties and fees: Contact the plan administrator for each account to ask about any fees associated with transferring accounts or withdrawing funds. You want to know about all potential fees, even as small as a wire transfer fee.
• Investigate investment options: The account that holds the bulk of your retirement savings should meet your needs.

When you're ready

Consolidating retirement accounts means rolling them into a new account. Let's say you have a 401(k) from one workplace, a SIMPLE IRA from another, and a traditional IRA that you opened yourself. After studying your options, you decide to roll over your 401(k) and SIMPLE IRA into a traditional IRA.

There are two ways to carry out a rollover: direct or indirect. A direct rollover means the current plan administrator sends the funds to the new account. This is generally the best way to ensure the entire balance is deposited there.

With an indirect rollover, the plan administrator must automatically withhold 20% of the total, and you only get it back if you complete the rollover within 60 days. Further, if you don't roll the money over within 60 days, you'll incur both taxes and an IRS distribution penalty of 10%.

Step-by-step rollover guidelines

Here's how to consolidate:

• Open a new account: If you're not rolling money over into one of your existing accounts, you'll need to open a new account.
• Make a rollover request: Contact the plan administrator holding your current accounts and request a transfer to your new account.
• Provide information: The plan administrator will need the new account number, routing information, or a mailing address for the institution receiving the rollover.
• Invest: Once you've moved the money, invest the funds to ensure continued growth.

If you believe consolidating your retirement accounts will help simplify your retirement, you're probably right.

The Motley Fool has a disclosure policy.