Fifty years ago, it wasn’t at all unusual for an individual to work his or her entire adult life for the same company. Today, however, by the time they reach age 50, the average baby boomer will have held nearly twelve different jobs.1 In tandem with the wholesale shift away from pension plans to defined contribution plans, many people find themselves juggling multiple legacy retirement accounts that they’ve maintained at previous employers.
While multiple retirement plan accounts aren’t necessarily a bad thing, they can present a number of difficult challenges on the road to a successful retirement. Not only does it require a significant amount of time and attention to efficiently and effectively manage several different accounts, corporate retirement plans often have a limited number of investment options making effective asset allocation difficult. When it comes to taking distributions, it can be easier to do from one account instead of several.
Retirement accounts left with former employers are easily overlooked, sometimes leading to sub-par performance. And frequently, individuals who hold a multitude of funds in different plan accounts don’t realize that their investments aren’t as diversified as they imagined due to a significant overlap in fund holdings across the different accounts.
The advantages of a Rollover IRA
Aside from the simplicity and convenience of consolidating your multiple plans into a single account, Rollover IRAs can offer several additional benefits. Rather than a handful of fund choices selected by a plan administrator, Rollover IRAs typically have a far wider variety of available investment options.
A single Rollover IRA account may make asset allocation, portfolio rebalancing and performance tracking easier to manage, and IRA fees are often lower than the annual administrative fees commonly charged by retirement plans. In addition, if you plan on utilizing retirement plan assets to partially fund a home purchase or to pay for educational expenses, it may be possible for you to take penalty-free withdrawals from an IRA which you can’t do with a 401(k) account.
Lastly, when all of your retirement assets are consolidated in one place, it greatly simplifies the process of changing and/or updating your beneficiary designations.
It’s important to keep in mind, however, that a Rollover IRA may not be optimal if you hold company stock in your legacy retirement plan account, as you could forfeit some important tax benefits. Also, if you anticipate having to periodically borrow from your retirement savings for things other than a home or educational expenses, most 401(k) plans permit penalty-free and tax-free loans provided the loan is paid back within a five-year period whereas loans from an IRA account are not permitted.
There are a host of factors to consider when deciding whether to leave retirement plan assets at a previous employer, to take a distribution, to roll them over to your current employer’s plan or opt for a Rollover IRA. And the laws governing retirement assets and taxation are complex. So talk to your SunTrust advisor about the pros and cons of these various options to help figure out which may be best for your particular needs, goals and circumstances.