Consider Consolidating Your Financial Accounts
By Saghir Aslam
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
If you’ve changed jobs a few times over the years or possibly relocated, chances are you’ve left behind a string of retirement and other accounts along the way. This can make your financial life complicated and difficult to manage. More importantly, maintaining a number of accounts at a variety of different financial institutions is not the same thing as diversification. All good reasons why consolidating your assets with one financial service provider can provide some key benefits.
First let’s consider two obvious benefits of consolidation: convenience and simplicity. Fewer accounts equal fewer statements, less paperwork at tax time, etc. Additionally, if you’re investing with several providers, you may be paying more fees than necessary. Generally, financial providers set fees based on account size – accounts with larger balances may qualify for break points and lower fees. Merging smaller accounts with one financial institution may provide opportunities to reduce account and transaction fees.
Consolidation also allows you to take control of your portfolio and manage it more effectively. If you have investments in a number of accounts, it’s difficult to see your overall asset allocation, ensure that your holdings are properly diversified, and effectively manage risk. By maintaining multiple accounts, you may be overexposed to certain holdings while leaving others underrepresented. Bringing your investments under one umbrella can provide a better view of your financial picture and allow you to see where investment opportunities – and potential risks – exist.
Another investment-related benefit of consolidation focuses on tax efficiency. Bringing retirement accounts and investment accounts together with one service provider may make it easier to implement a tax-efficient investing strategy. With all your assets in one place, you can be sure the least tax-efficient assets are in accounts that offer tax-deferral or exemption.
If you’re age 70 ½ or older, you must take required minimum distributions (RMDs) from Traditional, SEP, and SIMPLE IRAs, as well as from any 401(k) or other retirement plan accounts left with former employers. Failure to take RMDs on time or in the right amount can subject you to a 50% IRS penalty tax. Having all retirement assets in one place can help simplify RMD calculations and payments.
Consolidation also can help you keep beneficiary paperwork current. It’s important to always make sure all of your investment and savings accounts have up-to-date beneficiary information. This is especially important for retirement accounts, because beneficiary designations on retirement accounts supersede any instructions in your will or trust. Having fewer accounts to keep up with can help make it easier to manage this information.
If you decide to consolidate your accounts, make sure you consider all of the implications. Consolidating accounts might force you to liquidate certain investments that could result in unintended tax consequences. For instance, if you own appreciated employer stock in a 401(k) or other workplace retirement plan, you may no longer be able to take advantage of favorable tax treatment because of net unrealized appreciation (NUA) if you move those assets into an IRA. Other investments may carry surrender charges or other fees if you liquidate prematurely.
Consult with your tax professional and/or Financial Advisor before taking any action. Consolidating assets can offer a number of benefits but should only be done after careful consideration. The potential benefits of greater control, tax efficiency, lower fees, and convenience may make sense for you.
If you are considering rolling over retirement plan assets from a previous employer, please keep in mind that rolling over assets to an IRA is just one of multiple options for your retirement plan. Each of the following options is different and may have distinct advantages and disadvantages:
- Roll assets into an IRA.
- Leave assets in your former employer’s plan, if plan allows.
- Move assets into a new employer’s plan, if plan allows.
- Cash-out or take a lump-sum distribution.
When considering rolling over assets from an employer plan to an IRA, factors that should be considered and compared between the employer plan and the IRA include fees and expenses, services offered, investment options, when penalty free withdrawals are available, treatment of employer stock, when required minimum distributions begin, and protection of assets from creditors and bankruptcy. Investing and maintaining assets in an IRA will generally involve higher costs than those associated with employer-sponsored retirement plans. You should consult with the plan administrator and a professional tax advisor before making any decisions regarding your retirement assets.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale. This article is written in collaboration with Walt Hommerding of Wells Fargo advisers)