Three Strategies to Organize Your Retirement Accounts

For most Americans preoccupied with amassing enough savings to avoid running out of money in retirement, organizing their accounts and investments isn’t a top priority. Instead, they’re focused on accumulating as much in retirement assets as they possibly can. While that focus is commendable, without organization, it can be more difficult to create the sustainable retirement you’re seeking.

If you’re like most pre-retirees, you’ve likely saved for retirement for decades through jobs with different employers. That may mean that you’ve got retirement accounts with different employers. You may also have your own retirement savings account in the form of a traditional IRA or Roth IRA. If you have a spouse, the number of retirement accounts you have could easily double, or more. A 2021 research study by Capitalize revealed that Americans have more than $1 trillion sitting in 401(k) accounts with former employers.

And within those accounts you may have a mishmash of retirement investments. Often, the investments offered in retirement accounts are limited to captive offerings that may not align with your retirement objectives. Vanguard reports that the average employee enrolled in a 401(k) plan held 2.4 funds within their account. According to the Investment Company Institute, retirement plan participants in their 60s held, on average, 37.8% of their portfolio in stock funds, 28.2% in target date funds, 3.7% in non-target date balanced funds, 11.2% in bond funds, 1.3% in money market funds, 8.4% in stable value funds and 3.6% in company stock in 2023.

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Did you know that you don’t have to stay in those limited 401(k)s? You may have more opportunities than you think. To position yourself successfully for retirement, it’s important to get a handle on what you own, where those savings are located and have an understanding of all of your options so that you can organize your retirement savings in a way that is most accretive to your overall retirement goals. With that in mind, here’s a three-step process to set yourself up for success.

Strategy #1: Know what you own and where you own it

The first step in the organizational process is to track down all your retirement accounts. You can use online tools and apps such as Morningstar, Empower or Mint. You can also use a spreadsheet such as Excel or Google Sheets. What you use isn’t as important as actually creating a system and sticking to it. If you have a spouse or a partner, you can use the same method to track their retirement savings.

Start with your current employer and your company-sponsored retirement plan. If you have an IRA or Roth IRA, add that. If you’ve been in the habit of rolling over your retirement savings from past employers into your IRA, great job! If not, go onto the retirement savings portals for those employers and gather information.

If you’re already retired, you obviously don’t have a current employer; otherwise, the process is the same.

It is recommended that you track the specific investments you have, including mutual funds, exchange-traded funds, stocks, stable value funds and so on. You can track the price, if you want, although that can be difficult with investments within 401(k) plans that may not be easily tracked through the apps mentioned above. You can also include the overall value of each account to get an idea of your total retirement savings.

Strategy #2: Consolidate your accounts

If you’ve got retirement accounts that are still with past employers, now is the time to consolidate them into one place. That involves rolling them over into an IRA.

In general, IRAs are preferable to 401(k)s because they offer a wider universe of investment options. Many 401(k) plans don’t have many options; in addition, the options they offer may not be very good in terms of their diversification, performance or more. When you invest in an IRA, you have much more freedom to choose your investments and align those investments with a more retirement-friendly investment strategy.

How does that work? If you already have an IRA, you fill out specific rollover forms with the company that holds that IRA account, which is known as the custodian. Those forms are then sent to the custodian of your company-sponsored retirement accounts, which will then send the money to the IRA custodian. If you don’t already have an IRA, you will need to open an IRA and then transfer the retirement accounts from the other custodians into that new account.

This is a bit of a tricky area, as you don’t want to make a mistake that would cause a withdrawal, rather than a rollover, of your company-sponsored retirement funds. A withdrawal is taxable and may include penalties for early withdrawal from the IRS, while a rollover has no tax consequences.

The best way to accomplish this is with a direct rollover. In that case, your savings will go directly from your old 401(k) provider to your IRA custodian, leaving no room for tax complications.

The other option is an indirect rollover, in which you receive a check or direct deposit from your former employer and then deposit that in your IRA. However, your former employer’s retirement plan will initiate a 20% tax withholding in that case. You have 60 days from the date you receive the distribution to roll it over without penalty.

To handle the rollover without a tax mishap, follow this process:

• Confirm the account details of the retirement account with the former employer where the money will be transferred from, including the provider, account number, provider phone number and type of account, such as 401(k), 403(b), Roth 401(k) or other type of account.
• Confirm your IRA account details where the money will be transferred to, including the name of the financial services firm, account number and financial services firm phone number.
• Call the appropriate department, such as human resources, at your former employer to start the process of filling out the rollover paperwork.
• Call customer service at your IRA custodian to start the process of filling out the paperwork on their end, as they need to notify your former employer that they will accept the funds transfer.
• Follow up until the transfer is complete and the savings from your retirement account at your former employer are in your IRA account.

This process may be frustrating and time consuming, involving back-and-forth calls with the various service providers. Ultimately, though, it will be worth it to have your retirement savings consolidated. If you work with a financial adviser, they may handle all this for you, which could save you time, aggravation and potential mistakes.

Strategy #3: Consider in-service withdrawals

An in-service withdrawal from your current employer-sponsored retirement account is a powerful way to expedite your retirement savings investment strategy. An in-service withdrawal is a type of rollover from your current employer-sponsored retirement account into an IRA that you can initiate, oftentimes even before age 59½ without a tax penalty. This allows you to keep a portion of funds in your 401(k) and keep contributing, while rolling over the other portion into an IRA account better suited for your retirement goals. Essentially, you are allowing your money to work double duty for you!

To proceed with an in-service withdrawal, your employer-sponsored plan must allow in-service withdrawals. The best way to find this out is to call the appropriate department and ask.

The benefits of an in-service withdrawal are similar to rollovers from a former employer’s 401(k) plan to an IRA. You gain the advantage of having much more control over your investments in an IRA than in a 401(k) plan. As you move closer to retirement, the benefits are even greater, as you can adjust your strategy based on your time horizon.

When you’re saving for retirement, you are in what is known as the accumulation phase of retirement. But when you actually retire, you are in the distribution phase. The distribution phase is completely different from the accumulation phase, requiring a completely different investment strategy.

In retirement, you need ongoing income to replace your paycheck. That is what a retirement income strategy can help you achieve, which is why it is important to start on that at least several years before you retire. Otherwise, you could be subject to what is known as sequence of returns risk, in which the market is in a decline when you retire or right after you retire, reducing the value of your savings just when you need income in retirement. This situation can negatively impact or even delay your retirement plans.

Using an in-service withdrawal from your current 401(k) can help you avoid that risk, by moving money into an IRA with a more retirement-friendly investment strategy.

A final word

Nearly two-thirds of Americans are concerned about running out of money in retirement, according to a recent GOBankingRates survey.

Organizing and consolidating your retirement savings through IRA rollovers and in-service withdrawals can position you for a sustainable retirement. Having quality asset allocation and diversification can be a key factor in achieving your retirement. Be sure that you are aware of all of your options so that you don’t inadvertently limit your retirement investing options and potential.

Amy Buttell contributed to this article.

This information has been provided by an Investment Adviser Representative and does not necessarily represent the views of the presenting adviser. The statements and opinions expressed are those of the author and are subject to change at any time. Provided content is for overview and informational purposes only and is not intended and should not be relied upon as individualized tax, legal, fiduciary, or investment advice. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy.