Section III-B - Lesson 3
Your IRA - Moving And Consolidating IRAs
You’ll probably wind up with several IRA’s by retirement time. Consider the following scenario. You work for Company A for several years, and participate in its 401k plan, which you roll to an IRA when you leave to go to work for Company B. Company B does not have a 401k plan, so you establish a second IRA and contribute to it for several years before moving to Company C. Company C does have a 401k in which you participate until you retire, and then roll this plan into a third IRA.
You now have a rollover IRA from Company A, a rollover IRA from Company C, and a regular IRA that you used while working for Company B. All three IRA accounts may be held at the same mutual fund company, and may even be invested in the same fund, such as an S&P 500 Index fund. But you have most likely kept these three IRA’s separate, rather than allowing them to be combined into a single account, because there is often good reason to let an IRA maintain its original identity, as we’ll discuss momentarily.
Let's say you already have an IRA, and this IRA is held by a local bank or brokerage house, and it’s invested in whatever. You may have established this account quite a while ago, before starting to participate in your company’s 401k, or you may actually be contributing to this IRA right now, because you have no 401k. How do we go about moving this IRA to a mutual fund company where we can become invested in an S&P 500 Index fund, instead of what we have right now?
There are two aspects to this move, which is called a transfer of assets to a new custodian. You must close out the previous IRA by instructing the custodian to convert your assets to cash, and you must arrange for the cash to then be transferred to the new custodian and invested in an S&P 500 Index fund.
This is usually done by contacting the new custodian first, setting up your new account, and signing a request for transfer of your assets, which the new custodian will forward to the old custodian as authority for the switch. You do well to simultaneously contact the old custodian and ask if they require anything additional from you to comply with this request. You may also need to instruct them about converting the account to cash.
If you’ve been invested at a bank, in a bank CD, you may want to wait until the CD matures before making the switch. If you’re invested in stocks, at a brokerage firm, you’ll have other issues to deal with as to how and when to possibly sell your stocks in preparation for the move.
Depending on the size of the account, you may decide to avoid these decisions and leave the IRA where it is. If the account is small, however, and hasn’t been doing well, you may decide to “bite the bullet”, convert to cash, and move the IRA to your fund company. It’s also possible that your fund company has the ability to receive stocks into your IRA, as is the case with Vanguard and Fidelity, so that you can move your stocks over and make decisions later.
Representatives of your new custodian will be glad to offer guidance as to how to go about these transfers. They may not want to offer investment advice but they can be extremely helpful with administrative issues, and with keeping you out of trouble with the IRS.
Once you find yourself with several separate IRA's at the same mutual fund company there's a natural tendency to want to consolidate them all into a single IRA rollover account. Before you think of doing this be sure that there are no compelling reasons to retain the original identities of each account, such as specific tax considerations.
There's really nothing wrong with having several IRA's unless fees are eating you alive. Unless you know for a certainty that there are no hidden differences between two or more IRA accounts, it's a safer bet to keep them separate.
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