Consolidate Your Retirement Accounts Carefully

Merging your 401(k)s and IRAs can minimize taxes, avoid penalties and simplify RMDs. Just be sure to follow the rules.

(Image credit: Gary Burchel)

If you've worked for multiple companies in your lifetime, you probably have had several different 401(k) plans, some of which you may still own. You also may have a couple of IRAs, a Roth IRA, and a brokerage account or two.

At some point, you may think consolidating some of the accounts would be a smart approach, helping you organize and track your investments and perhaps save some money with fewer account fees. If so, you aren’t alone. An Investment Company Institute survey of traditional IRA owners who rolled employer money into IRAs found that consolidating assets was among the reasons they opened their accounts.

A typical employee who has worked for 30 years likely has switched jobs six or seven times and may have just as many former employer plans, according to Terry Dunne, senior vice president at Millennium Trust Co. From 2005 through 2015, 25 million participants in workplace plans separated from an employer and left at least one account behind. Millions more left two or more accounts behind.

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Consolidating your employer plans in one IRA instead “retains the tax-advantaged status of the assets, allows more choice of investments and ensures you remain in touch with your assets,” Dunne says.

But while consolidation ideally results in “simplification and convenience,” it’s not as easy as it sounds, says Ajay Kaisth, a financial planner with KAI Advisors, in Princeton Junction, N.J. Consolidating can help you manage asset allocation, diversification and rebalancing, and may help reduce taxes and fees. But there are some good reasons for maintaining separate accounts, and you “need to be sure that the benefits outweigh the costs,” he says.

Different account types can offer different features. You might want to keep a 401(k) plan that has lower-cost institutional shares of mutual funds and access to commission-free trading, instead of rolling it into another account that doesn’t include those features. But if you want to make a qualified charitable distribution, you can only do that through an IRA.

Know Your Options for Consolidating IRAs and 401(k)s

Before you make any moves, be sure you understand some basic rollover rules and what options are available to you, Kaisth says. Review the rollover chart at Be sure to study the specific rules of each of your plans; custodians can vary in whether rollovers are allowed and what kind of fees are involved, says Joyce Streithorst, a financial planner with the Frisch Financial Group, in Melville, N.Y.

And there are some situations in which accounts can’t be consolidated. For instance, a husband’s IRA and a wife’s IRA cannot be consolidated while they are both alive. And you cannot combine two inherited IRAs that you receive from two different people.

Once you know the rules, weigh the pros and cons of consolidating. On the pro side, combining accounts makes it easier to manage your money and “to see the big picture,” Streithorst says. Fewer accounts mean fewer monthly or quarterly statements, fewer companies to notify if you move or want to change beneficiaries, and possibly lower costs.

Consolidating also makes it easier to calculate and take required minimum distributions after age 70½, Kaisth says. For each 401(k) you own, you must take a separate RMD. But if you consolidate old 401(k)s into one rollover IRA, you can take a single distribution. Consolidating can help you reduce any duplication of investments. And there’s a potential estate-planning benefit to consolidating, Kaisth says. Beneficiaries will end up inheriting fewer accounts.

But there are some drawbacks to consider, says Tiffany Beard, a financial planner with Wealth Enhancement Group, in Jacksonville, Fla. And many of those drawbacks particularly affect early retirees, who might lose options to access money penalty-free if accounts are consolidated. If you retire at age 55 and your funds are in an employer-sponsored retirement account that allows partial withdrawals, you’d want to keep that account separate, she says. That allows you to take out money without paying the 10% penalty for early withdrawals, which you would face if you rolled the funds into an IRA.

If you are under age 59½ and you want to take money from an IRA, you could use the 72(t) strategy, she says. Say you have $1 million in your IRA, but you don’t want to take distributions based on that large balance. You could split off $500,000 into a separate IRA and take withdrawals penalty-free using the 72(t) rules, in which you withdraw the money in substantially equal periodic payments. Once you finish the distributions from that IRA, you’d still have the other IRA to use later in life, Beard says.

For many people, consolidating may not be a yes or no choice, but more a question of timing. Debbie Foran, 64, of Jacksonville, Fla., worked with Beard over the years to maintain two separate IRAs to take advantage of the 72(t) rules after she took an early retirement package at age 51. The strategy allowed Debbie and her husband, Jerry, to save money for retirement while covering living expenses and paying off their home. “I’ve always been able to get that money that I need,” Debbie says.

Because Debbie had some after-tax and pretax money in her 401(k), it didn’t make sense to roll that money into one rollover IRA. When Debbie retired in 2006, the pretax money was rolled into a traditional IRA and the after-tax money into a taxable account for her to access without penalty, Beard says.

Jerry retired the same year as Debbie. And because he was age 57, he kept his 401(k) plan with his employer so he could take a $50,000 distribution without the 10% early-withdrawal penalty. Once Jerry reached age 59½, he could consolidate and draw from his IRA penalty-free to cover any living expenses, Beard says.

Debbie planned on taking another job, but after the Great Recession and spending time with her grandchildren, she decided not to. So Beard helped Debbie at age 54 carve out a separate IRA from her original IRA to use the 72(t) provision. With that new IRA, she could take a distribution of nearly $39,000 each year, and the original IRA was set aside for future use.

Once Debbie was past age 59½ and free of the 10% early-withdrawal penalty, it was no longer necessary for her to keep separate IRAs. She combined the accounts back into one IRA for simplification, Beard says.

Mary Kane
Associate Editor, Kiplinger's Retirement Report
Mary Kane is a financial writer and editor who has specialized in covering fringe financial services, such as payday loans and prepaid debit cards. She has written or edited for Reuters, the Washington Post,, MSNBC, Scripps Media Center, and more. She also was an Alicia Patterson Fellow, focusing on consumer finance and financial literacy, and a national correspondent for Newhouse Newspapers in Washington, DC. She covered the subprime mortgage crisis for the pathbreaking online site The Washington Independent, and later served as its editor. She is a two-time winner of the Excellence in Financial Journalism Awards sponsored by the New York State Society of Certified Public Accountants. She also is an adjunct professor at Johns Hopkins University, where she teaches a course on journalism and publishing in the digital age. She came to Kiplinger in March 2017.