retirement

Can I consolidate IRAs with my spouse?

Liz WestonDear Liz,
Is there a way to transfer a traditional IRA into a spouse's IRA to consolidate the funds for easier self-management and reduced fees?
-- Patrick

Dear Patrick,
Retirement accounts are like credit scores. Each person has his or her own, and they can't be merged after marriage. (Spouses can inherit retirement accounts, of course, but that's not what you're asking.)

Consolidating to one investment firm still can make sense. Not only will it be easier to manage and coordinate your investments, but some firms lower or waive fees based on how much a household has invested with them. For example, Vanguard waives its $20 annual fee for accounts with less than $10,000 when a household has total assets with the firm of $50,000 or more.

People who have more than one IRA should at least consider consolidating to make the investments easier to manage. Consolidating into one account is possible as long as the accounts are the same type of IRA.

There are two basic types: IRAs that are tax-free in retirement (Roths) and those that aren't (such as traditional IRAs, SEP IRAs and rollover IRAs). You can combine a SEP IRA with a traditional or rollover IRA, for instance, but you can't simply combine a traditional IRA with a Roth. You can convert a traditional IRA or a 401(k) to a Roth, but you'll owe income tax on the conversion, so talk to a tax pro first.

You also can roll over old 401(k) and other qualified workplace retirement plans into a traditional IRA. Many people opt to do so to make managing their retirement accounts easier. But there are some disadvantages to these rollovers as well.

Advantages of hanging on to your workplace retirement plan:

  • Investors in many 401(k) plans have access to institutional funds that are cheaper than any equivalents available to retail, or individual, IRA investors.
  • Money in a 401(k) is protected from creditors, while the protection for IRAs may be limited to $1 million.
  • IRAs require you to start distributions after age 70 1/2, but 401(k) plans do not if you continue working past that age.
  • After you terminate employment at age 55 or older, it can be easier to take penalty-free distributions from a 401(k) in any amount (if the plan allows).

If any of those issues could be relevant to your situation, you might be better off keeping your 401(k) account where it is.

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