Can you make your life easier by consolidating retirement accounts?

If you've held several jobs throughout your career, you may have more than one employer-sponsored retirement account on top of an IRA or two. Managing multiple retirement accounts can involve a lot of paperwork - and cause a lot of stress. Consolidating them into a single IRA or workplace plan can save you time, help you keep track of beneficiaries and potentially reduce what you pay in fees. What's more, your retirement plan from a job you left five years ago may not reflect your personal goals and risk tolerance anymore. Moving all your plans into one account can be an important first step to realigning your retirement savings with your goals.

Retirement plan contributions: An essential guide

Answers to key questions about saving money in an IRA and managing your account.

Individual retirement accounts (IRAs) can allow for potential long-term growth, increase your tax efficiency and provide you with steady retirement income. But the rules surrounding these retirement accounts can be tricky. Kevin O'Neil, managing director and product management executive, Personal Retirement Solutions, Investment Solutions Group at Merrill, fields the most common questions around contributing to and managing your IRAs.

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Who can contribute to an IRA?

Anyone with income that meets the IRA definition of taxable compensation — typically from a full- or part-time job or a business — can open and contribute to a traditional IRA. Taxable compensation for these purposes does not include interest or dividends, rental income, Social Security benefits or child support. The rules for Roth IRAs are slightly stricter than for traditional IRAs and include an additional requirement: Your modified adjusted gross income (MAGI) for that year must also be below a certain required limit to fund a Roth IRA. For help in determining which IRA best suits your needs, try our Retirement Account Selector tool.

If you are eligible to contribute to a Roth IRA, your annual contributions are made with after-tax dollars and are not tax deductible. With a traditional IRA, on the other hand, your contributions may be tax deductible. If you or your spouse is covered by a workplace retirement plan, such as a 401(k), you may be able to contribute to a traditional IRA and deduct the full contribution or a portion of it, depending on your filing status and if your MAGI is below certain limits. A tax professional can help you calculate your contribution.

How much can you contribute to an IRA?

The contribution limit is determined by the tax laws and changes over time. If you are 50 or older at any time during the applicable tax year, tax laws allow you to put in an extra amount each year or what is known as a catch-up contribution. Review current contribution limits. You can contribute to an IRA as early as January 1 or as late as the tax year's filing deadline in mid-April.Footnote ¹ While the contribution limits for a Roth IRA are generally the same as for a traditional IRA, your contribution limit may be reduced depending on your MAGI.

What if you exceed the IRA contribution limit?

Going over the annual limit can happen easily. You can simply miscalculate, or your contributions to a Roth IRA could become ineligible because your income exceeded the limit. Plus, the annual IRA contribution limit applies to your combined contributions to a traditional IRA and a Roth IRA, so you might lose track and contribute too much if you're funding both. Contributions in excess of the annual limit may be subject to an additional tax. In some cases, they are not imposed if the excess contribution and any earnings are removed by making a corrective distribution. Work with your tax advisor and IRA provider to remove excess contributions and with your tax advisor to appropriately report on your tax return if you have made an excess contribution.

Can you contribute to both a 401(k) and an IRA?

Yes, you can contribute to both a 401(k) plan at work and an IRA on your own. However, when you have access to a 401(k), your filing status and MAGI will determine whether your traditional IRA contribution is tax deductible. If your employer matches your 401(k) plan contributions, it may be a good idea to prioritize your 401(k). But because the tax advantages offered by 401(k)s and IRAs are so powerful, you may want to contribute the maximum to both accounts if you can afford to save that much. This is especially impactful during your peak earning years.

How many IRAs can you have?

There's no limit to the number of IRAs you can have. The real question is how many you should have. Saving for retirement is challenging enough without having to review your performance across a broad range of accounts. Keeping multiple IRAs open can make it harder to maintain an asset allocation that's aligned with your goals.

Multiple IRAs may make sense because their features differ as is the case with traditional and Roth IRAs. Roth IRAs offer the potential for tax-free distributions, so it may be a good idea to add money to a Roth if you are currently in a low tax bracket and think you may be in a higher one in retirement.Footnote ² You may prefer a traditional IRA if the current tax savings are more important. If you're thinking of converting to a Roth IRA, you may want to consider how the changes might affect your tax planning and contribution restrictions.

Can a working spouse fund an IRA for their nonworking spouse?

Just as with single filers, married couples can have multiple IRAs — though jointly owned retirement accounts are not allowed. You can each contribute to your own IRA, or one working spouse can contribute to both accounts. Married couples that file a joint return can take advantage of a spousal IRA, which allows one spouse to contribute to an IRA despite having little or no earnings as long as the other spouse has sufficient taxable compensation. If one spouse funds both accounts, the total contributions generally can't exceed your joint taxable compensation or double the annual IRA contribution limit, whichever is less.

What are the pros and cons of rolling over a workplace retirement account into an IRA?

When you leave a job where you have an employer-sponsored retirement account like a 401(k) or 403(b), you have the option of rolling those retirement assets into an IRA.Footnote ³ You also may be able to leave the assets in your former employer's plan, depending on the size of your balance, or move them to your new employer's retirement plan. In some cases, you may choose to roll over only a portion of an account or even take a distribution and invest outside of a tax-advantaged account. For more information, review this full rundown of the potential benefits and drawbacks of choices for what to do with your employer-sponsored retirement plan.

Do you have to pay taxes when you roll over your 401(k)?

Rolling over a pre-tax employer-sponsored retirement plan to a traditional IRA is not a taxable event. However, a mandatory federal income tax withholding would apply on the distribution unless you have your former employer's plan send the money directly to your new IRA custodian — or send you a check made payable to your new account with an IRA custodian. Contact your IRA custodian if you are unsure of where the money should be sent. If you don't, your former employer must withhold 20% for federal income taxes.

When the money is sent directly to you, you have 60 days to put the funds, including an amount equal to the 20% withheld for federal income taxes, into an IRA, or it will count as a distribution. This could subject you to federal income taxes and an additional 10% federal tax if you're under the age of 59½ and no exception applies.

You can get started with a rollover by contacting the plan administrator. A rollover IRA isn't right for everybody. Consider all your choices in consultation with your tax and financial advisors and decide whether rolling over may be the right choice for you and your retirement goals.

Next steps

Learn how much you will need to retire with our Personal Retirement Calculator
Read these 5 steps that can help you maximize your retirement savings
Use these resources to learn how to make the most of your peak earning years
Get answers to your questions about retirement plan withdrawals

Footnote ¹ You generally have until April 15 of the year following the tax year to make IRA contributions for that tax year. If April 15 falls on a weekend or a holiday, the deadline is typically the next business day.

Footnote ² Generally, for a distribution from a Roth IRA to be federal (and possibly state) income tax-free, it must be qualified. A qualified distribution from your Roth IRA may be made after a five-year period has been satisfied (this period begins January 1 of the tax year of the first contribution or the year of conversion to any Roth IRA) and you (i) are age 59½ or older, (ii) are disabled, or (iii) qualify for a special purpose distribution, which is for the purchase of a first home (lifetime limit of $10,000). In situations where the original account owner is deceased, distributions to the beneficiary are also considered a qualified distribution. If you receive a non-qualified distribution from your Roth IRA, the earnings portion of such distribution generally will be subject to ordinary income tax plus a 10% early withdrawal additional tax if received before age 59½ unless an exception applies. A 10% early withdrawal additional tax may also be owed on converted Roth IRA principal withdrawn before the end of the five-year period. Although RMDs are not required for the original account owner, RMDs would apply to the inherited IRA account.

Footnote ³ You have choices for what to do with your 401(k) or other type of plan-sponsored accounts. Depending on your financial circumstances, needs and goals, you may choose to roll over to an IRA or convert to a Roth IRA, roll over a 401(k) from a prior employer to a 401(k) at your new employer, take a distribution or, where the plan permits, leave the account where it is. Each choice may offer different investments and services, fees and expenses, withdrawal options, required minimum distributions, and tax treatment (particularly with reference to employer stock), and provide different protection from creditors and legal judgments. These are complex choices and should be considered with care.

Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
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