Baby boomers average approximately 12 jobs in their lifetimes, according to the U.S. Bureau of Labor statistics. Tack on several bank and brokerage accounts to 401(k) money left behind at one or more of those dozen employers and older adults can easily rack up far more investment accounts than necessary.
Having too many investment accounts “makes efficient management almost impossible and also increases costs,” says Lawrence Solomon, director of investments and financial planning at OptiFour Integrated Wealth Management in McLean, Virginia.
Of course, it’s impractical, even impossible, to combine all your investment accounts into one. Tax-advantaged and taxable accounts, for example, will always need to remain separate as those dollars cannot be mingled. The same is true for individual retirement accounts that are funded with pre-tax or after-tax contributions.
How you invest may also limit how much you can consolidate. Investors using a bucket savings strategy will always need at least three accounts to separate near-term, intermediate-term and long-term investments. Anyone accessing unusual investment strategies through a hedge fund or an individual wealth manager may want to keep other investments separate to limit the damage if the worst happens.
“The next Bernie Madoff is out there,” says Laurie Itkin, a financial advisor and portfolio manager at Coastwise Capital Group. “Do you really want to put all your eggs in one basket?”
Although the exact number of accounts an investor should have depends on the individual, one principle remains the same for everyone: Winnowing that number to the bare minimum gives you greater control and simplicity, advantages that especially matter once you retire.
Your portfolio is easier to track and manage. Consolidating accounts can help you spot overlapping assets and diversify better. You can view your account more holistically, and it makes implementing an asset allocation strategy, which may require shifting money around to different types of investments, much easier, says Eric D. Nelson, managing partner and CEO at Servo Wealth Management in Oklahoma City.
Staying on top of your asset allocation becomes even more important as you get older. With fewer years to recoup losses, older investors will want to choose investments that minimize volatility, making them less prone to steep rises and losses during market ups and downs.
[See: 8 Reasons to Play It Cool When the Market Drops.]
Costs can be kept to a minimum. Larger account balances are often eligible for perks and discounts that investors can’t get if their money is scattered in smaller amounts among multiple accounts.
For instance, many firms offer cash bonuses to new customers who transfer assets, with higher bonuses given to larger balances. Bonuses at Ally Invest range from $50 to $3,500 for new account transfers, depending on the amount transferred.
Financial advisors typically lower management fees for larger accounts. By holding their accounts with one investment company, Solomon’s clients gain access to lower-cost mutual funds, including institutional funds.
Then there are the trading commissions, which at most brokerages are a flat fee no matter how many shares are bought and sold. When all the shares you own in a single company are consolidated into one account, you pay one commission when buying and selling that stock, instead of several commissions for multiple accounts, says Nelson.
No one needs multiple 401(k) accounts. There’s a reason why financial advisors tell their clients to roll over money from an old employer’s 401(k) into the new employer’s plan or an IRA. By combining 401(k) accounts as you age, you’re less likely to lose track of an old account.
“It is common for investment accounts to simply slip through the cracks and be completely forgotten as people reach their later years,” says Daniel Ruedi, financial advisor at Ruedi Wealth Management in Champagne, Illinois. “Managing fewer accounts relieves stress on retirees and helps them avoid the headaches of tracking down lost accounts or forgetting about accounts entirely.”
[See: 7 Things You Need to Understand About Your 401(k).]
In a few instances, especially if debt and creditors are involved, you may want to hang onto one 401(k) account even into retirement. Unlike IRAs, pension plans, such as 401(k)s and 403(b)s, are protected by the Employee Retirement Income Security Act of 1974 (ERISA). One of the law’s protections is that creditors can’t seize your investments, says Fred Leamnson, founder and president of Leamnson Capital Advisory in Reston, Virginia. By rolling over your 401(k) into an IRA, you’ll also lose the ability to borrow from the account, and you will be required to pay off any existing loans before the roll over.
Withdrawals are simpler. Required minimum distributions (RMDs) at age 70½ from retirement accounts can be a headache if you’ve got multiple investment accounts. This is especially true if they’re a mix of 401(k)s and IRAs, as you must calculate and take RMDs from each account separately.
If the accounts are all IRAs, “RMDs get calculated for each account and can be taken from one single account,” says Leamnson. The same is true for calculating and taking RMDs when you have more than one 401(k). It is simpler and easier, though, to combine as many similar accounts as possible, especially if you don’t roll the money over.
IRAs also should be consolidated where possible. Just remember that individual spouses need their own IRAs, and you can’t combine a traditional IRA funded with pre-tax dollars with a traditional IRA that was funded with money you’ve already paid taxes on. If you have a traditional IRA funded with after-tax dollars (also known as a nondeductible IRA), you can combine that with a Roth IRA, as taxes have been paid on both accounts and they follow the same IRS rules.
Simplifying the number of accounts matters because missing an RMD will cost you — a lot. “If you don’t take the RMD on an IRA or inherited IRA, there is a nasty 50 percent penalty imposed by the IRS on the gross amount that was supposed to be withdrawn,” Solomon says.
Your caregivers and heirs will thank you. Consolidating as many of those accounts as possible will also make it easier for a trusted family member or financial advisor to step in and manage your finances when you no longer can, says John Madison, CPA and financial coach at 60 Minute Finance.
Often, that point happens gradually over time. “There is seldom a bright line between when someone can prudently manage their assets and when they become prone to error or fraud,” says James Hemphil, chief investment strategist and managing director at TGS Financial Advisors.
Having fewer investment accounts also reduces the chances of your estate planning being for naught. With fewer accounts, you’re less likely to forget to update the beneficiary. The beneficiary named on your retirement account inherits the money when you die no matter what your will says.
[Read: Prepare Now to Help Your Heirs.]
So if you forget to update your IRA beneficiary, the money you wanted to go to your current husband could go to your ex-spouse instead, says Scott Pedvis, New York-based financial advisor for Wells Fargo Advisors. “IRA assets bypass the probate process and will be distributed based on the beneficiary form, not the will,” he says. Forgetting to update the form “can have the detrimental effect of disinheriting loved ones or misdirecting your funds.”
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5 Reasons to Consolidate Your Investing Accounts originally appeared on usnews.com
