In late 2003, a national survey found that almost one half of all Americans own two or more of the same type of retirement accounts, such as an employer-sponsored 401(k) plan or Individual Retirement Account. By continuing to maintain multiple accounts and spreading their assets, these investors may actually be doing their long-term savings a disservice. If you have multiple retirement savings accounts, the strategy of consolidation could help you save time and money as well as maximizing your investing power.
How does consolidation help you save money? Multiple accounts usually translate to multiple custodial fees, so by reducing the number of accounts you own, you may lower the amount you pay in these fees. Gathering your assets into a larger sum may also make you eligible for a lower fee category, helping you reap additional savings. Compounded over the years, these expense reductions can make a real difference in your account balance.
Consolidation as a financial strategy. Consolidation also helps you gain better control of your savings. Managing assets that are spread out among various institutions and former employers is more challenging than when they’re combined in a single account. You can get a clearer picture of your savings when they’re in one location as opposed to many. It’s easier to allocate assets to achieve the balance you are looking for when your investments are under one roof.
Some investors fall into the trap of thinking they are fully diversified merely by owning multiple accounts. The opposite may, in fact, be true. Diversification is how you invest your money, not where you keep it. Even though your money is invested in three or four accounts, it may be sitting in similar asset classes with significant overlap in underlying investments. I’ve often times met with investors who owned several funds with different names but owned 30-50 percent of the same stocks. Holding your investments in one account enables you to more easily see how your assets are allocated and to make adjustments to remove imbalance and unnecessary market risk.
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Consolidation in an IRA helps simplify your efforts to diversify and may also provide more investment choice and flexibility than most company plans. With an IRA, you can have hundreds of options to choose from including mutual funds, stocks and bonds.
Consolidation can help you simplify your life. You’ll spend less time reviewing your investments when you receive just one statement each month rather than three or four. With one account, you know exactly where your money is, and have just one call to make if you have questions.
Other advantages of consolidation are ones you may realize further down the road, either in retirement or when you’re planning your estate. You will be required to take distributions from your retirement accounts once you reach age 70 1/2. Distributions must be calculated for every qualified retirement account and mistakes can be costly due to potential tax penalties. With your assets consolidated in a single IRA, you’ll also have greater estate planning flexibility, including the ability for non-spouse heirs to stretch tax-advantaged investment growth over their lifetime.
Finally, consolidation can give you clout. By pulling all of your assets together within a single financial institution, you may be able to receive added services, better pricing, privileges and discounts. In other words, you may become eligible for elite programs and perks.
Consolidation is easy to do and may be beneficial to the future of your retirement savings. Keep in mind that consolidating your assets in one IRA account can save you annual custodial fees, but typically does not reduce or eliminate product fees or sales charges.
Kris Flammang, a financial adviser with LPF Financial Advisors, can be reached at (941) 907-0101 or firstname.lastname@example.org.