In the past, spring cleaning was mostly about refreshing our immediate physical environment. (Do I really need all these sweatpants? Have we ever dusted the top of these cabinets?) But this year, it’s bound to encompass a whole lot more. Over the next few months, many of us will be taking stock, of not only the things we own, but also what’s most important to us as we resume our (almost) normal lives.
In fact, this might be one of the most important “spring cleaning” seasons in recent memory. We’re all deciding how and when we’re going to return to school, to work, to in-person events. We’ll be weighing the costs of social engagements and travel much more carefully. And we’ll need to take a hard look at how our finances have transformed over the past year, as well as how we might improve our financial wellness moving forward.
One key part of financial wellness: consolidation.
Think of financial consolidation as the Marie Kondo-ing of your investment accounts. The ultimate spring cleaning … of your money. And let’s be honest, there might be a lot to tidy up! In the US, the average Baby Boomer has changed jobs 12 times during the course of their career. This often results in multiple retirement accounts across multiple former employers and financial institutions. And when you factor in non-retirement accounts — like bank accounts, taxable investment accounts, and trusts — it’s no wonder how easy it is to lose track of them all.
The good news is that consolidating your accounts can help give you greater agency over your money in the long run.
Why should I consolidate my accounts?
Your money should be working for you. When you consolidate your investments, you make them easier to view and manage. This can help you monitor your asset allocation, streamline portfolio rebalancing, and create a tax strategy. And if you have a concentrated stock position, working with an advisor who has oversight of your broader investments can help you establish an action plan to diversify that position over time. Put simply, consolidating accounts makes you a more nimble investor.
Simplify your retirement and estate planning. Consolidating retirement accounts, in particular, can help you map out big retirement-related considerations like wealth decumulation, required minimum distributions (RMDs), and your giving strategy over time. And consolidation in general can help you streamline account details like personal information and beneficiary designations — key things to keep up to date as part of your broader estate-planning approach.
Reduce fees. Most financial advisors charge a tiered portfolio advisory fee based on your total assets under management — but these fee tiers typically decrease as your assets under management increase. This means that if you combine accounts, you could pay fewer fees overall.
What accounts can I consolidate?
Retirement investment accounts. You can consolidate most retirement accounts in your name — including traditional IRAs, SIMPLE IRAs (after two years), 401(k)s (see the “things to keep in mind when investing” section below), 457(b) plans, Qualified plans, and 403(b) plans — by “rolling over” these funds into a traditional IRA. Designated Roth accounts and Roth IRAs can also be rolled over into a single Roth IRA. Rollovers just require you to deposit your retirement assets into another retirement plan / IRA within 60 days in order to ensure the money remains tax-deferred. Full rollover rules are detailed by the IRS here.
Taxable investment accounts. Non-retirement accounts can also be consolidated. As I mentioned above, merging your own individual accounts can make it easier to keep track of your assets and could potentially reduce the fees you pay. But you can also combine your individual investment accounts with someone else's to form a joint investment account. Joint accounts are most commonly held by spouses, but they can be opened by family members or investing partners, too. Combining the ownership of financial assets with another person is called joint tenancy. You just need to designate whether the type of joint account ownership is joint tenants with rights of survivorship or joint tenants in common. This titling determines how the assets are split should a joint account owner pass away.
What accounts can’t be consolidated?
Spouses’ IRAs. While married individuals can each have multiple retirement accounts, joint or combined retirement accounts are not allowed. That said, couples where one individual has low or no earned income can consider setting up a spousal IRA.
Inherited IRAs. Inheritance tax laws don’t let you roll over an inherited IRA into your own IRA, unless you inherited the IRA from a spouse. In all other cases, you’ll have to open an inherited IRA account in the name of the deceased with you as the beneficiary, and you’ll be held to certain withdrawal rules.
Taxable accounts. You can’t consolidate trusts with different tax IDs or with registrations that have different trustees. Talk with an estate planning attorney to determine which assets might be best to put into the name of a trust. Note: You may not be able to consolidate other taxable accounts (individual, joint, living trust, etc.) with irrevocable or inherited trusts.
Things to keep in mind when consolidating
401(k) nuances. Some 401(k)s contain a traditional (pre-tax) component and Roth (post-tax) component — like if you elected to contribute to a Roth and your employer match went into a traditional. In order to roll those funds over, you will need to open up both a traditional IRA and a Roth IRA.
Rollover limits. You can only do an indirect rollover from one IRA into another IRA once a year. That’s not once per calendar year, or even once per tax year — it’s once per rolling 12-month period. This applies whether it’s traditional-to-traditional or Roth-to-Roth. That said, direct rollovers and traditional-to-Roth conversions don’t count, which means you can initiate as many of those as you like. (Rollovers from your employer retirement plan, like a 401(k), to an IRA don’t count, either — those are different.)
Know your (consolidation) partner! A consolidation strategy is only as good as the investment partner you choose to consolidate with. Like with any partnership, ask as many questions as possible before committing. We suggest starting with: Are you a fiduciary? What type of accounts can I open here? Who is your custodian? How do you protect my assets? Are you able to transfer my investments in-kind? Do you offer financial planning? What is your service model? What is your fee structure?
Where do I start?
Talk to the Ellevest Private Wealth Management team. Seriously — we obsess about our clients and how to make their money work best for them. Typically, we’ll start with a conversation about your overall financial situation to get a clear understanding of your needs and goals. We’ll review and map out your existing accounts and asset allocation, and then put together an investment proposal for how we might work together. Should you move forward with Ellevest Private Wealth, our service team removes the heavy lifting from the process to help you open accounts and transition assets, all the while taking taxes and transaction costs into account.
Whatever you decide, we hope this breakdown can set you on the path toward a healthier, tidier financial picture. Happy spring cleaning!
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You may or may not have noticed that we linked to investopedia.com for more information on joint tenancy. FYI, Investopedia (“Solicitor”) serves as a solicitor for Ellevest , Inc. (“Ellevest”). Solicitor will receive compensation for referring you to Ellevest. Solicitor will be paid $10 when an individual activates a membership. You will not be charged any fee or incur any additional costs for being referred to Ellevest by the Solicitor. The Solicitor may promote and/or may advertise Ellevest’s investment adviser services. Ellevest and the Solicitor are not under common ownership or otherwise related entities.
We also linked to nerdwallet.com for more information about spousal IRAs. FYI, Nerdwallet, Inc (“Solicitor”) serves as a solicitor for Ellevest , Inc. (“Ellevest”). Solicitor will receive compensation for referring you to Ellevest. Solicitor will be paid $20 when an individual activates a membership. You will not be charged any fee or incur any additional costs for being referred to Ellevest by the Solicitor. The Solicitor may promote and/or may advertise Ellevest’s investment adviser services. Ellevest and the Solicitor are not under common ownership or otherwise related entities.
Information was obtained from third party sources, which we believe to be reliable but not guaranteed for accuracy or completeness.The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.
Planning to work past the age of 70½?
Once an individual reaches age 72, the rules for both 401(k) / 403(b) plans and IRAs require the periodic withdrawal of certain minimum amounts, known as the required minimum distribution (RMD).
If you continue to work past the age of 72, however, your plan might not require you to make withdrawals from your 401(k) / 403(b) plan until you stop working. That means the funds in your plan can continue to grow tax-deferred until you retire. This is different from an IRA, where you’re required to start making withdrawals starting at age 72, whether you’re working or not.
Filing for bankruptcy?
If you are considering filing for bankruptcy, then funds you have held in a 401(k) or 403(b) plan are generally protected from creditors. Depending on your state of residency, funds in your IRA may not be fully protected from creditors. Please consult with your legal professional for additional guidance as to what may be applicable for your situation.
Comparing important factors when considering a 401(k) or 403(b) rollover:
Fees and Expenses
In general, both plans and IRAs typically involve (i) investment-related expenses and (ii) plan or account fees. “Investment-related expenses” may include sales loads, commissions, the expenses of any mutual funds in which assets are invested, and investment advisory fees. (Ellevest does not charge loads or commissions.) “Plan fees” typically include plan administrative fees (ex, recordkeeping, compliance, trustee fees) and fees for services such as access to customer service representatives. In some cases, employers pay for some or all of a plan’s administrative expenses. An IRA’s account fees may include, for example, administrative, account set-up, and custodial fees. (Each of the fee types listed here may or may not apply to your portfolio managed by Ellevest; please see your Client Agreement for details.)
Click here to read Ellevest’s Form ADV.
Required Minimum Distributions
Once an individual reaches age 70½, the rules for both plans and IRAs require the periodic withdrawal of certain minimum amounts, known as the required minimum distribution. If a person is still working at age 70½, however, they generally are not required to make required minimum distributions from their current employer’s plan. This may be advantageous for those who plan to work into their 70s.
If an employee leaves her job between age 55 and 59½, she may be able to take penalty-free withdrawals from a plan. In contrast, penalty-free withdrawals generally may not be made from an IRA until age 59½. It also may be easier to borrow from a plan.
The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person.
Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
Investing entails risk including the possible loss of principal and there is no assurance that the investment will provide positive performance over any period of time.