If you are preparing for retirement and have multiple investments spread among a number of accounts and institutions, you may want to consider making your life easier and possibly saving yourself money by consolidating your accounts. Here’s why:
1. Managing multiple accounts that are similar such as Joint accounts, IRAs, and 401(k)s can become pretty confusing and very time consuming. If, in addition, you own individual or company stock, tracking cost basis can be a nightmare. Do you really want to spend so much of your time managing all these investments once you retire?
2. Having 401(k)s from current or former employers and individual retirement accounts (IRAs) in a number of financial institutions makes it difficult to track portfolio performance, asset allocation, and diversification. You’ll at least need to rebalance your portfolio periodically. This would be much easier if your retirement funds were all in one place.
3. You may be paying account and annual fees on each of your accounts. By consolidating “like” accounts, you may be able to reduce your fees.
4. If you aren’t aware of the different IRS requirements that go with each different account, it could cost you money. Here’s an example:
We once had a call from a prospective client who had a tax issue. This particular person was 80 year old and had taken $300,000 from an account. Shortly afterwards he received a tax bill for about $100,000. What we found out was that the account he took the money from was a Traditional IRA and he owed income tax on the withdrawals. We also found out that he had not been taking his yearly RMD (Required Minimum Distributions) for the past ten years. He was potentially facing a steep $50,000 penalty tax on the amount he was supposed to have withdrawn over that time.
This is an extreme case, I know, but it does demonstrate what can happen when you aren’t sure of the types of accounts you have and the rules associated with them.
What You Can Do:
Consolidating similar accounts is an easy first step.
Say you have two old 401(k)s from previous jobs, you can roll them over into an IRA, thus having all your pretax retirement accounts consolidated to one. The most notable advantage to this comes in the form of Required Minimum Distribution. (RMD) When you turn 70-1/2, you have to take out a percentage of your IRA (about 3-4%) and you will have to pay taxes on that money. The same applies to any and all of your 401(k)’s. If you have them all as a single IRA, there will only be one calculation and one RMD instead of several. ROTH IRAs do not have the RMDs associated with them but, ROTH 401(k)’s do. These accounts can be consolidated into a single ROTH IRA and make administration that much easier. For your retirement planning, you and your spouse should consolidate into no more than seven accounts. One Joint or two Individual accounts, one IRA each, one ROTH IRA each and a current 401(k) if you are still employed.
Of course, it is always important to talk to a financial professional before you begin to consolidate your accounts as they will know the different rules and requirements for each type of account and what is best for your situation.
Once everything has been consolidated, you will be on your way to freeing up time and that extra money you saved on a well-deserved retirement!
Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail firstname.lastname@example.org.
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