Spring cleaning season is here. For most, the garage, basement and wardrobe immediately come to mind as needing an annual review, but what about reviewing that pile of retirement account statements that have accumulated throughout the year?
Often when people switch jobs, open separate retirement accounts or have accounts left to them, those funds stay separate and dispersed among companies, institutions or owners. However, some individuals may be able to save time and possible expense by rolling older or multiple retirement accounts into a single Individual Retirement Account (IRA).
IRAs allow investors to continue saving for retirement on either an income tax deferred or an income tax free basis. IRAs can hold mutual funds, bonds, or cash investments, based on an individual’s risk tolerance and desires for growth.
Current rules permit nearly every qualified retirement plan to be either transferred, or rolled over, to another qualified retirement plan. (A financial professional can help navigate the rules and exceptions for combining various plans.) Common qualified retirement accounts that might be eligible for a rollover include: 401(k), 403(b) or 457(b) plans. Should account holders meet a distribution event under these retirement plans, like leaving an employer to take another job or retiring, balances can be transferred or rolled over to either another employer-sponsored qualified plan or an IRA on an income tax advantaged basis.
Two options for IRAs: tax now or tax later
A traditional IRA accepts pre-tax contributions which are taxed, along with any investment earnings, upon distribution. A Roth IRA accepts income contributions that have already been taxed. Those contributions, along with any investment earnings, are dispersed income tax free if certain requirements are met. As with any investment, the growth of these two types of accounts isn’t guaranteed and there are inherent risks.
An IRA rollover is the act of funding an IRA account with assets being rolled over or transferred directly from an existing tax-qualified retirement account, such as a pension plan, a profit sharing plan, 401(k) plan, 403(b) plan or another IRA, typically, without either tax penalty or income tax withholding, for continued tax-deferred growth. Special rules apply to distributions to and from designated Roth 401(k), Roth 403(b), Roth 457(b) and Roth IRA accounts, as Roth accounts can only be rolled into a Roth IRA.
The advantages of a single retirement account
The act of consolidating retirement accounts into a single IRA can have some advantages when it comes time to take mandatory distributions. This usually happens at the age of 70 1/2 for most taxpayers. By having one IRA, retirees will only need to make one annual calculation and one annual distribution. Multiple retirement plan accounts would necessitate multiple annual calculations and multiple annual distributions.
In addition, it may get easier to track later in life. For example, in the event the person needs assistance or is unable to manage his own finances, managing one retirement account can be easier for caretakers.
Finally, consolidating retirement plans into one account can make it easier for loved ones to locate and handle, upon the death of the retirement account holder. Death is often a time of confusion when it comes to finances. Simplifying the number of retirement accounts can help relieve some of the burden for loved ones at a difficult time.
While it may take some time on the front end, evaluating retirement accounts could have some worthwhile results at the end. Find a trusted financial professional and a tax advisor, both of whom can help you review the tax impacts and differences in services, fees and expenses between each of the choices before you make a decision. Plus, eliminating those piles of paperwork will make next year’s spring cleaning even easier.
To find more information about IRA, visit www.thrivent.com/IRA. Talk to a financial representative about specific questions and concerns.