By Elizabeth O'Brien | Sunday, March 22
The American retirement system encourages entropy–a 401(k) here, a 401(k) there, an IRA somewhere else entirely. As workers leave jobs, their 401(k) might not follow them to the next place or get rolled into an IRA. Some of that might reflect a deliberate decision to leave an account with a former employer that offers good investment choices and low fees. But I'd venture that it's mostly due to inertia or intimidation. The rollover process can be complicated, and people might understandably be nervous about moving their life savings.
Yet there's a disadvantage to having money scattered across institutions. For starters, it creates more paperwork at tax time, when you have to keep track of documents from different firms. It also makes it harder to look at your portfolio holistically and rebalance accordingly. You might not benefit from volume discounts that you might otherwise get on a large balance at one place.
But the biggest disadvantage comes in your 70s, when it's time to take required minimum distributions. If you've got all your money at the same firm, the company can do the calculation for you and automatically send you the correct RMD amount at your desired frequency. If you have money here, there and everywhere, you're pretty much on your own. Read more about the complicated RMD rules in today's edition.
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