As many of you know, I have a weekly public television show on WDSC Channel 15. One of the best things about doing the television program is working with the “crew” who helps put the broadcast together each week. Even for a “smaller-budget” program like ours, the TV production team includes several people: a production manager, an assistant producer, a director, a floor director, a technical director, an audio person, 3 camera operators and a make-up artist! Several members of the crew are in their twenties, and here’s what’s great – they are all inquisitive and eager to learn about their finances! Not only is the group highly skilled in their individual roles, but they are always anxious to interact with me and my guests between segments. I truly enjoy sharing my financial knowledge and advice with them. So, one morning, one of the camera operators asked me this question, and I thought it was a relevant topic for this week’s column. I’ll paraphrase her thoughts:
“I’ve got 401(k)s and IRAs from previous employers and they are just floating around in ‘limbo’ in a couple of different locations. What should I do? Should I leave them alone or is there something better I should be doing with them?”
Personally, I like the idea of consolidating those “orphaned” 401(k) accounts (or other pre-tax, employer-sponsored retirement plans) into one IRA. The reason is twofold: 1. A single IRA account will be much easier to manage. 2. More money in one account (instead of several) can open up additional investment choices to you. What do I mean by that? Well, if you are investing in mutual funds, for example, there is usually a minimum investment to buy into the fund. Some have greater minimum investment requirements than others. More money means you have a larger pool of investment funds to choose from. You can think of it like a casino, where there are $5 tables, $10 tables, $50 tables and $100 tables. You can’t play at a $100 table if you only have $5. I think it’s better to be able to “play” at more tables, not fewer.
And, here is another suggestion. Should there be a year when you earn less money, and you have already consolidated your IRA, you might consider converting some of the IRA into a ROTH IRA. You will have to pay taxes on the money you roll over into the ROTH (since no taxes have been paid thus far), so you might not want do it when your salary is at its peak. One of the benefits of a ROTH IRA is that, once you pay taxes, future growth and withdrawals are tax free, as long as you meet and comply with the IRS’s rules.
That was a great question from the PlanStronger™ crew, and I’m sure there will be many more when we start our fifth season of production this summer! If you have an opportunity to watch, please tune in!