Having fewer accounts provides a clearer picture of your overall financial health, increasing confidence and control.
Hi, I'm Luke and I'm addicted to credit card points. I have one credit card for groceries, another for restaurants, one for gas, and a fourth for everything else. This behavior is normal, according to Experian, which found that the average American has four active credit cards. But collecting these credit cards probably consumes more of my brainpower than it’s worth.
It is also common to have multiple bank accounts. I have clients who come to me with a dozen accounts at multiple banks. Major checking, major savings, money market, CDs, children's accounts and more. Regardless, generating meaningful interest cannot be the motivation for a savings account—currently the average savings account only pays 0.4% in interest.
Another area of bloat I see is in retirement and investment accounts. I'm guilty of this too. People often have one or more old 401(k) or 403(b) plans, one or more traditional or Roth IRAs, and perhaps multiple brokerage accounts. This proliferation makes investing more difficult, in large part because it is more difficult to achieve orderly asset allocation.
Still others inherit IRAs from their parents but never consolidate them their IRA – An IRA that leaves two to three additional inheritances for the beneficiaries. These IRAs can all be rolled into one account, but inertia tends to keep them separate.
With all the different financial accounts – credit cards, banks, loans, brokerages and superannuation – no one can blame you for not having a clear financial picture.
Allow me to briefly describe how you can simplify your financial life. Consolidating investment accounts is one of the first things we do for new clients, and it creates a huge sense of accomplishment with relatively simple paperwork.
Especially as you approach retirement, life will be easier if you transfer all your accounts to a single custodian.
For example, an employer retirement plan such as a 401(k) or 403(b) can be rolled into a single rollover traditional IRA along with any other old traditional IRAs, simple IRAs, and SEP-IRAs. (Note that assets from a Roth 401(k), Roth 403(b), or Roth IRA can also be rolled into a single Roth IRA, although these accounts are not known as “rollover” accounts).
Combining brokerage accounts and Roth IRAs, you may have no more than three investment accounts in your name (married couples may have twice that number, since IRAs cannot be held jointly).
Consolidation may ultimately save time and effort. Moving accounts to a single custodian makes it easier to track investments and monitor performance. Moving accounts from old workplace retirement plans (such as 401(k)s) to rollover IRAs can provide more investment options and may help reduce investment-related fees.
Having a smaller number of accounts also simplifies withdrawals during retirement, making it easier to manage your income. As you age, the Internal Revenue Service (IRS) requires that you withdraw a minimum amount from your tax-deferred IRA each year (currently starting at age 73). If you still have such an IRA spread across various locations, you run the risk of missing out on one of these required minimum distributions – and potentially paying a hefty penalty.
Having all your accounts in one place can help you get a clearer picture of your total retirement savings, helping you better plan for your retirement goals. Consolidation can also help simplify tax reporting.
Finally, consolidating accounts allows you to better and more easily manage your estate plan—for example, if you want to name or update beneficiaries.
Some are wary of merging accounts at a single firm, such as Charles Schwab or Fidelity, for fear the institutions could collapse. If that includes you, remember that these custodians will not keep your assets on their balance sheets. The accounts and assets you hold are your own. They are not the property of the Custodian. Even in the unlikely event that the custodian fails, creditors cannot go after your account.
In a world where we are often encouraged to add more—more accounts, more choices, more complexity—there may be value in doing the opposite. You gain confidence and control by having fewer accounts to monitor and a clearer view of your overall financial health. Simplifying your financial life doesn't mean giving up anything. It’s about making smart, purposeful decisions with what you’ve worked hard to preserve.
Luke Delorme, CFP® is the Director of Financial Planning at Tableaux Wealth in Great Barrington, MA (www.tableauxwealth.com), reachable luke@tableauxwealth.com. To stay up to date with the Squared Away blog, join our free email list.
This blog post is for informational and educational purposes only and should not be construed as financial advice. Please consult a qualified professional for advice specific to your situation.
