From your first checking account to your current 401(k) planA 401(k) plan is a retirement account that a company sets up on behalf of its employees. Both the participant and the employer can contribute to the account. There are two types of 401(k)s, traditional and Roth. Income invested in traditional 401(k)s isn’t taxed while it’s invested, but is taxed when it’s withdrawn. Income invested in a Roth 401(k) is taxed before it’s invested, but no tax is paid when it is withdrawn., by the time you reach your 50s, you may have opened accounts with dozens of financial institutions. But if you’re like most people, you may not have closed nearly as many.
When we begin the financial planning process for our clients and see an excessive number of account statements from a plethora of financial firms, one of the first steps we recommend is consolidation. Streamlining can help improve your investment returns, reduce fees and, most importantly, give you a clearer picture of your financial situation—a crucial step when preparing for retirement.
Here are five ways to simplify your financial life:
- Use Fewer Custodians. Trying to maintain a cohesive portfolio strategy with multiple accounts at different institutions is sure to create confusion. The best fix is to decrease the number of accounts you manage, making it easier to grasp the overall state of your finances and remain on track with your goals. This will be even simpler if you can consolidate with a single custodian.
- Reduce Excess Cash. Your emergency fund is the foundation of your financial plan. We recommend keeping enough cash to cover three to six months of expenses. But after years of asset accumulation, you may find that you have more cash on hand than you need, scattered among multiple accounts. As a result, you’re likely missing out on years of compound growth.
- Consolidate Retirement Savings. Odds are you haven’t spent your entire career with one firm—meaning you may have retirement funds stashed in several 401(k) or retirement accounts. Leaving funds to languish in forgotten accounts often means they’re part of a stale investment strategy that’s no longer suitable for your goals. In some cases, rolling the funds into an IRA might lower your costs and improve your returns; in others, it may be preferable to stick with a 401(k).
- Put Your Estate in Order. Having accounts that are streamlined, with beneficiaries listed, will help ensure that your assets pass to heirs in accordance with your wishes. It will also make it easier for your beneficiaries to settle your estate after you pass away.
- Avoid Tax Penalties. Under current law, required minimum distributionsA required minimum distribution is the amount of money that must be withdrawn each year from tax-deferred retirement accounts once the beneficiary reaches retirement age (72, according to IRS rules). (RMDs) from your retirement accounts begin at age 72. Consolidating your retirement accounts where possible will make RMD management easier, helping you avoid tax penalties.
While consolidation has many advantages, remember that seeking professional investment management for an account will likely come with a management fee. In many instances, the advantages will justify the cost. If you would like to explore consolidation opportunities, please contact your portfolio team. We are ready to assist.