- September 4, 2021
- Posted by: Parker Evans
- Categories: Financial Planning, Retirement Planning, Wealth Management
Here’s why you should consider a Rollover IRA to consolidate retirement accounts left at prior employers.
If you’re like most workers in the modern U.S. economy, you’ve had more than one employer over your working lifetime. If you’re savvy and fortunate, you participated in an employer-sponsored defined contribution plan. Such plans include the IRA, SEP, SIMPLE IRA, 401(k), 403(b) TSA, TSP, Profit-Sharing, Money Purchase, or 457(b). Better yet, you may also have participated a defined contribution or pension.
So, you might have one or even several retirement accounts left behind at prior employers. Now’s the time to rescue, roll over, and consolidate your stranded retirement accounts. Here are five reasons why a Rollover IRA makes sense.
1. Expand Your Investment Opportunities
2. Reduce High Account Fees
3. Simplify and Consolidate Your Accounts
4. Avoid Losing an Unclaimed Account
5. Update Your Beneficiary Elections
Expand Your Investment Opportunities
Most employer-sponsored defined contribution retirement plans have a limited number of fund choices for investment. On the other hand, there are thousands of available stocks, bonds, and ETFs in a rollover IRA at Charles Schwab, TD Ameritrade, or Interactive Brokers. A licensed, experienced, independent, fee-only financial advisor can help you chose the investment that’s best for you rather than what’s best for your prior employer.
Warning! Be cautious about rolling over a lump sum pension balance. That’s a tricky decision. It’s often better to leave a pension balance where it is. Talk with a non-commission fiduciary advisor. Evaluate both the risk and growth potential of your lump sum pension benefit. Compare the pension estimated monthly income to what’s available from an agent-sold, lifetime annuity contract. Do not make a hasty, ill-advised decision to roll over a defined benefit pension balance.
Reduce Fees and Expenses
Defined contribution plan fees and expenses vary widely between sponsors. Plans sponsored by smaller employers tend to be more expensive. But that’s not always the case. Another rule of thumb is the more difficult it is to find the cost, the higher it likely is. A rollover IRA invested in ETFs can be vanishingly low cost. For example, at most online brokers the annual all-in expense to hold a $10,000 investment in the iShares S&P 500 ETF (IVV) is about $3. In comparison, a high-cost, defined benefit plan could set you back 50X more, or about $150 per $10,000.
Simplify Your Finances
It’s almost always a good idea to consolidate small defined benefit accounts into a single substantial IRA rollover account. Be sure to select a serious, low-cost online broker. Avoid gamification brokers such as Robinhood. It’s far easier to keep track of a single login and one account statement versus a half dozen scattered retirement accounts. And it’s easier for you and your advisor to see the big picture regarding asset allocation, security selection, and overall account performance.
Avoid Losing and Forfeiting Your Accounts
Approximately 1 in 10 people have unclaimed property, according to the National Association of Unclaimed Property Administrators. Don’t be that guy. There are literally billions of dollars in unclaimed property, including investments, held by state governments and treasuries within the United States. As time goes by, forgetting about or otherwise losing a small account is a real risk that’s avoidable by consolidating your stranded retirement accounts into a single, more meaningful account.
Keep Your Beneficiary Elections Up to Date
Whether you have a first-time spouse or second marriage, be sure to update the beneficiary of your retirement accounts. Again, this is much easier to if you have just one account. Many people in second marriages name their adult children as beneficiaries, or in combination with the current spouse. Few people want to leave a retirement account to an ex-spouse. Yet many do by accident or neglect.
Moreover, some employer-sponsored plans have unfavorable distribution rules that become problematic for a beneficiary upon the death of an account owner. As a rule, the custodian of a rollover IRA is a better choice for financial and estate planning than is the administrator of a plan sponsored by a long-ago prior employer.