How to Combine Retirement Accounts
It can get confusing to keep track of how much money you have and how it is invested when you have a lot of different retirement accounts. For the most part, you can combine them, though certain restrictions apply.
And combining at least some them is a good way to simplify your retirement planning. For example, you will have fewer accounts to take required minimum distributions from once you reach age 70½, and having fewer accounts should mean you're paying less in management fees overall.
Know Your Account Type
In general, accounts that function in a similar way can easily be combined without any tax penalty. The first seven items in the list below are all funded with pre-tax money; when you withdraw money for retirement, it will be taxed. Roth accounts are funded with post-tax money.
Retirement Account Types
- 457 plan
- SIMPLE IRA
- Pension plan
- Roth IRA
- Roth 401(k) (also called a designated Roth account)
If you have a few different accounts from the first seven items in the list, those can be combined into one IRA account. This process of combining accounts into an IRA is called an IRA rollover.
The Roth IRA and Roth 401(k) function in a similar way to each other. They're both funded with after-tax money; when you withdraw money for retirement, it won't be taxed so long as you follow the IRS's disbursement rules. If you have both a Roth IRA and a Roth 401(k) at retirement, your Roth 401(k) can be rolled over into, or combined with, your Roth IRA.
If your pension plan, number eight in the list, offers you the ability to take a lump sum distribution, that entire amount can usually be rolled over into your IRA.
The IRS permits you to roll over any of the first seven types of accounts into a Roth IRA in a process known as a Roth conversion. When you do a Roth conversion, the amount that's converted is included as taxable income on your tax return that year, so that means you could end up owing a large sum of money to the IRS.
Before you carry out a Roth conversion, you should consider whether it makes sense for your particular situation, including whether you expect to be in a higher tax bracket when you will begin withdrawing the funds or whether you want to pass along all or part of the account tax-free to a beneficiary. You may also want to consult with an accountant or financial planner.
Avoid Tax Penalties
When combining retirement accounts, you should make sure the assets are being moved in a rollover, which is a direct transfer of assets from one retirement account into another.
For example, if you are moving an old 401(k) plan into your IRA, you will complete paperwork or an online form that directs your old 401(k) plan to make the check payable directly to the new custodian for the benefit of you. For example, if your IRA is at Charles Schwab and your name is Jane Smith, then your 401(k) provider would make the check payable to “Charles Schwab for the benefit of Jane Smith.”
You won't ever see that check, and that's a good thing, because it means the rollover was done correctly and you've avoided a 20 percent tax penalty. However, if the custodian of the account wrongfully mails you a check made out to you, you can still spare yourself a tax penalty if you act quickly.
You have 60 days to deposit this check—which will have had 20 percent withdrawn for federal income tax—into the IRA. You must also deposit the amount that was withdrawn for income tax so you can get that money back from the IRS when you next file a tax return. If you don't deposit that entire sum of money—the amount of the check and the amount that was taken out for income tax—and you are under age 59½, you may also be subject to a 10 percent early-withdrawal penalty.
Beware of Restrictions
There are some restrictions to be aware of when performing a retirement account rollover.
Only One IRA Rollover Per Year
You can make only one rollover between IRAs in any 12-month period, so if you have a lot of IRAs to consolidate, you'll have to spread the rollovers out. This time restriction applies to traditional IRAs, Roth IRAs, SIMPLE IRAs, and SEP-IRAs.
This rule does not apply to:
- Conversions of traditional IRAs to Roth IRAs
- Rollovers from any other type of retirement plan to an IRA
- Rollovers from an IRA to a different type of retirement plan
- Rollovers between non-IRA retirement plans
If you carry out a second IRA rollover before 12 months have passed, the IRS requires you to include as gross income on your tax return any previously untaxed amounts distributed from an IRA. And those amounts may be subject to a 10 percent early-withdrawal penalty tax.
You Can't Move a Current Plan
While you are still working for a company that has a retirement account you (and hopefully the company, through an employer match) are contributing to, you can not move that retirement account anywhere else. However, many company-sponsored plans allow you to move outside retirement accounts into your current plan.
Check with your 401(k) plan provider to see if you can roll over 401(k)s from previous employers or existing IRAs into your current workplace plan.
Before making such a move, however, consider the fees you pay for your current 401(k) and the quality of the investment options. You may be better off leaving the funds where they are or moving them to an IRA that gives you more investment choices.
Two-Year Wait for SIMPLE IRAs
You must wait two years after establishing a SIMPLE IRA before you can combine it with a different type of retirement account, either by rolling funds out of it or into it. However, you do not have to wait two years before combining it with another SIMPLE IRA.
Roth IRAs and Roth 401(k)s Are Limited
You can not roll over a Roth IRA into any other type of retirement account. And a Roth 401(k) can be rolled over only into a Roth IRA or another Roth 401(k).
Spouses Can't Combine Accounts
Spouses can not combine retirement accounts while they're both alive. A retirement account must be titled in one person’s name.
After you or your spouse dies, the deceased person's IRA can be rolled over into the surviving spouse’s IRA. Your spouse must be the beneficiary of your IRA unless they have signed a waiver giving you permission to name someone else. The same rule does not apply to a 401(k) account.
The IRS has a Rollover Chart that summarizes which types of retirement accounts can and can not be rolled over into the other types of accounts and the restrictions that apply to those rollovers.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.