Using a rollover IRA to consolidate multiple retirement assets

Text size: aA aA aA
Your retirement plan assets may be your most important legacy when you move from one job to another. If you change jobs several times throughout your career, as many individuals do, your retirement plan assets could end up scattered among numerous accounts. Consolidating your retirement assets in a rollover IRA can help you manage these assets carefully and efficiently over the long term.
In addition, you may be able to roll over to an employer-sponsored plan at a new employer (if the new employer's plan accepts rollovers), take a distribution, or leave the account where it is, depending on your unique financial needs and retirement goals. Consider all of your choices and learn if a Rollover IRA may be right for you.Footnote 1

Rollover IRAs vs. employer-sponsored plans

When leaving a job in which you have retirement plan assets, two of your options are to keep the money in the plan or direct the balance to a rollover IRA.
  • Greater control of investments. As the IRA account owner, you make the key decisions that affect management and administrative costs, overall level of service, investment direction, and asset allocation.Footnote 2 For example, your IRA can access the investment experience of any available fund complex, not just those funds offered by your former employer's plan.
  • Broader exemptions from early withdrawal rules. In general, withdrawals from an IRA made before you turn age 59½ are subject to an additional 10% tax, yet there are some exceptions. For IRAs, these include qualified expenses for education, a first-time home purchase and health insurance premiums paid while unemployed — none of which are available in an employer-sponsored plan. Special rules apply to each of these exceptions. For more information, consult your legal or tax advisor for advice and guidance.
  • More flexibility in estate planning. Generally, IRA assets can be divided among multiple beneficiaries in an estate plan, which facilitates tax-advantaged strategies such as stretch IRAs. Beneficiary distributions from employer-sponsored plans, in contrast, are generally taken in rollovers to inherited IRAs or lump sum cash payments, dependent on the terms of the plan.
While there are many potential advantages to consolidated IRA rollovers, there are some potential drawbacks.
  • Required minimum distributions (RMDs). If you are age 70½ or older as of December 31, 2019 you are required to take an RMD for 2019. Effective January 1, 2020, in accordance with new legislation, the required beginning date for RMDs is now increased to age 72.Footnote 3 You still may defer your first RMD until April 1 of the year after you turn age 70½ or 72, as applicable, however you will then be required to take two distributions within that year.
  • Costs. Fees and investment expenses may be higher in an IRA than an employer-sponsored plan.

Tax planning for rollovers

Whether setting up a new rollover IRA or adding to an existing one, the distribution may constitute a taxable event, so consider the following carefully.
  • Direct rollovers. Consider instructing your former employer to transfer your assets directly to your IRA's custodian. This is because, under federal tax rules, a lump-sum distribution that is not transferred directly from one retirement account to another is subject to a mandatory income tax withholding of 20%.
  • Cashing out instead of rolling over. If you spend the lump-sum distribution rather than reinvest it in another tax-qualified retirement account, you'll generally have to pay ordinary income taxes. This is in addition to the 10% tax noted above if you are younger than age 59½ at the time of the distribution and no exception applies.
  • The 60-day rule. Any checks made out to you are subject to a 20% withholding tax — even if you plan to move it to an IRA immediately. In that event, you can get the 20% refunded if you complete the rollover within 60 days. You must deposit the full amount of your distribution in your new IRA, making up the withheld 20% out of other resources, but can request a refund when filing your tax return for that tax year.
  • After-tax contributions. If you have both pre-tax and after-tax contributions in your employer-sponsored plan, you may opt to convert the after-tax assets to Roth assets and roll over the after-tax portion into a Roth IRA without incurring additional taxes. To do this, however, you must take a full distribution of your account from the employer-sponsored retirement plan. You could roll over the pre-tax amounts to a traditional IRA or another employer-sponsored retirement plan if you want to continue the tax-deferred growth potential of the pre-tax assets.
  • Company stock. Many employers make some or all of their contributions to employee accounts in the form of company stock. If you do not elect a rollover of the portion of your account that is attributable to company stock, you may be able to receive a distribution of the actual securities rather than their cash value. In the year of distribution, you will owe income tax based on the value of the stock at the time it was contributed to your account, and any appreciation in the value of the stock between the time it was contributed to your account and the time you sell the stock is taxed in the year you sell the stock at the long-term capital gains rate rather than ordinary income tax rates. (This is called an "in-kind" distribution and should be discussed with your legal and/or tax advisor in advance.)
Remember, the laws governing retirement assets and taxation are complex. In addition, many exceptions and limitations may apply to your situation. Therefore, you should obtain qualified professional advice before taking any action.
Keep in mind that fees and investment expenses may be higher in an IRA than your employer-sponsored plan.

Under the CARES Act, all 2020 RMDs have been waived.

Due to the CARES Act, in certain situations, you can take a distribution from your IRA or retirement plan and repay it later on if you are affected by the coronavirus.

Learn more about the CARES Act implications for retirement plans and accounts.
You have choices about what to do with your employer-sponsored retirement plan 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 an employer-sponsored plan from your old job to your new employer, take a distribution, or leave the account where it is. Each choice may offer different investment options and services, fees and expenses, withdrawal options, required minimum distributions, tax treatment, and different types of protection from creditors and legal judgments. These are complex choices and should be considered with care. For more information on rolling over your IRA, 401(k), 403(b) or SEP IRA, visit our rollover page or call a Merrill rollover specialist at 888.637.3343.
Footnote 2 Generally, you would have the ability to direct your investments and asset allocation in your former employer's plan, but you can do so using the menu of investment options that the plan provides.

Footnote 3 Note that minimum distributions are not required for a Roth IRA during the original account owner's lifetime.

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.
The information contained herein is general in nature and is not meant as tax advice. Consult a tax professional as to how this information applies to your situation.

© SS&C. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

The material was authored by a third party, DST Retirement Solutions, LLC, an SS&C company ("SS&C"), not affiliated with Merrill or any of its affiliates and is for information and educational purposes only. The opinions and views expressed do not necessarily reflect the opinions and views of Merrill or any of its affiliates. Any assumptions, opinions and estimates are as of the date of this material and are subject to change without notice. Past performance does not guarantee future results. The information contained in this material does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, or strategy. Before acting on any recommendation in this material, you should consider whether it is in your best interest based on your particular circumstances and, if necessary, seek professional advice.

Because of the possibility of human or mechanical error by SS&C or its sources, neither SS&C nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall SS&C be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.