How To Handle Multiple Retirement Accounts

At some point in you working life, you’re likely to manage from three to five retirement accounts at the same time. This doesn’t include Social Security or defined-benefit pensions that are managed for you. Hard to believe that you’ll have so many? Let’s look at the various types.

Your largest accounts will probably be for employer-sponsored “defined contribution” plans such as the 401k, 403(b) (for teachers and health-care workers), or 457 (for government employees). Most employer-sponsored plans let you contribute up to $16,500 a year, and your employer can kick in even more. Keogh plans (for the self-employed) clock in at 15-25% of income, depending on the type of plan. These amounts can vary, so check it out from time to time. It’s in your interest to max out your contributions, especially if the boss adds matching dollars.

Then there are the many types of IRAs (individual retirement accounts). You and your spouse can contribute up to $5,000 a year (even if one of you doesn’t work). In the traditional IRA your contribution is tax-deductible, and investments grow tax deferred until withdrawn. Even if an employer’s plan makes you ineligible for a deductible IRA, you can opt for a non-deductible IRA and get the tax deferral. In either case, by age 70 1/2 you’ll have to make withdrawals. Whenever you withdraw, the proceeds are taxable as ordinary income.

Another variation is the comparatively new Roth IRA. You contribute after-tax dollars (which means no deduction), again up to $5,000 a year for each spouse. However, if you will be 50 or older by the end of the year, you can contribute an extra $1,000, for a $6,000 total IRA contribution limit. The funds accumulate tax free, and can be withdrawn tax free after age 59 1/2 — if they’ve been in the account for at least five years. You don’t have to withdraw the money at any particular age, and can even leave it to your heirs income-tax free.

Finally, there are also self-directed IRAs. These lesser-known accounts, opened with private trust companies, are for those who want to own real estate, rare coins and other IRS- approved assets that banks and brokerage houses don’t sell.

To best manage this bevy of accounts, consider this realistic approach:

Understand that these accounts are not investments, but ways of holding investments. If I ask you what you are cooking, would you describe the pot? No, that’s just the receptacle. Same with retirement accounts. They are just the statutory shell. The stocks, bonds, and mutual funds held in them are your assets.

When you make investment decisions, view all the accounts together. If one account has a lot of stocks and another doesn’t, you may still have a perfectly balanced allocation. Your assets are not necessarily lopsided, even though each account may be. In fact, that’s one reason people start more than one IRA. They may want an international fund that’s not sold by their broker, so they open a small additional IRA with a mutual-fund company.

When you calculate how well you are doing, look at the total return of all your retirement assets. Don’t be mislead by one poorly or well-performing account.

Make your 401(k) style contributions first. These plans may offer limited choices, depending on the administrator chosen by your company. So decide how much you will save for the year in each class of investment – such as large-company stocks, small-company stocks, international bonds, etc. If you can save only the max of your 401(k), spread your money between the best- performing funds to achieve a reasonable amount of diversification. If you can contribute more, and you’re eligible, open a Roth IRA. The tax-free withdrawal feature is a real gift. If you’re not eligible for the Roth, choose a traditional IRA. And if you’re not eligible for that either, a non-deductible IRA still gives the benefits of tax deferral.

Pay close attention to the cost of multiple accounts. In general, it’s best to have as few accounts as possible. (An exception: some investments are only available from particular providers.) You’ll be charged at least $25 a year just to maintain an account. An inactive one may cost even more. And the paperwork can get overwhelming as you try to reconcile many statements. It helps to choose custodians that all issue statements at the same intervals, monthly or quarterly.

If you expect to need money for a house down payment, fund the most flexible accounts first. Many 401(k) plans let you borrow against your balance. If yours doesn’t, fund a plan that does, such as a regular or Roth IRA.

Eventually your plans will all be consolidated. As if! You may look forward to the day that you retire and manage only one retirement IRA. Forgetaboutit. You are even more likely to manage several accounts in retirement. The best way to prepare for that day is to start now.