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Multiple Retirement Accounts? Considerations Before Consolidating

Is your retirement portfolio a mess? Sometimes a natural result of changing jobs several times over your lifetime can be an accumulation of several retirement accounts. For example, you may have three 401(k) accounts, a Roth IRA and a couple of traditional IRAs.

Is it best to leave everything as is, keeping a mishmash of accounts, or is consolidation worth considering?

If you are contemplating consolidation, here are some factors you need to take into account:

Roth IRAs – If you are in a consolidation mood, one thing to remember is you don’t want to mix the money in a Roth IRA with the money in a traditional IRA or a 401(k) account. The reason: Contributions to a Roth IRA have already been taxed, so you don’t pay tax on them when you reach retirement and begin withdrawing money. But with traditional IRAs and 401(k) accounts, the taxes were deferred so they are subject to tax when you begin withdrawals.

Nondeductible IRAs – Money placed in a nondeductible IRA, as the name implies, isn’t a deduction on your income taxes. That means you won’t pay any taxes on the money you contributed when the time comes to withdraw it either. Just as with a Roth IRA, you don’t want this money mixed with retirement money that is taxed when it is withdrawn.

Merging 401(k) accounts – Often you can merge a 401(k) from a previous employer into a 401(k) at your new employer. That kind of consolidation can be convenient because you just have one account to monitor. But it’s not always the best strategy because some 401(k) plans are better than others. Fees with the old plan might be lower than the new plan, or the investment options might be more varied. You also have the option to roll the old 401(k) into an IRA, which could be worth considering depending on your circumstances.