We often hear from clients that they want to simplify their investments and accounts. Simplify could mean less complexity or easier management or just fewer tasks. Since some holdings are complex by nature, I suggest to clients that we look for efficiency and I use the term streamline instead of simplify.
Here are ways to streamline investments with some details about what to watch out for.
#1 Consolidate accounts
If you have accounts at different investment companies or banks, it can be nice to put them all together. Once accounts are combined, you will get fewer statements and tax forms. You can see the big picture more easily. If you use tax-loss harvesting, it will be easier to monitor for (and hopefully avoid) wash sales, when the same security is bought and sold in a small window of time.
What to watch out for
- Deposit insurance: Check the FDIC, NCUA, or SIPC insurance limits on your accounts at each institution. If your accounts are over a limit, that’s a red flag to protect your money quickly. If consolidating accounts would put you over the limits, you may be better off keeping the accounts separate.
For example, FDIC insurance covers up to $250,000 per account holder and account type. A single person with a savings account with a balance of $600,000 may not be insured for $350,000 if the bank went under.
NCUA provides similar insurance for credit unions, and SIPC is for brokerage accounts. Some institutions have additional, private insurance with higher cash and account limits.
- Retirement accounts: Sometimes you need to keep IRAs or 401(k)s separate, such as if you are retiring between 55 and 59 ½ or if you inherited the account.
If you retire at age 56, say, you would potentially owe a 10% penalty on withdrawals from an IRA until you turn 59 ½. If you instead leave the 401(k) with your former employer, you can take penalty-free withdrawals (though not tax-free).
Inherited IRAs are subject to a lot of different rules, depending on when it was inherited, who it was inherited from, and your age (and health) upon inheriting it. Two inherited IRAs could be subject to different rules about withdrawals, which could also be different from the rules governing your own personal IRA.
- Brokerage accounts or bank accounts: When you reduce the number of accounts (and institutions), you will eventually get fewer tax forms. In the first tax season after closing accounts, though, you will likely need tax forms from both the old and new accounts.
#2 Reduce the number of investments
Often people accumulate investments over the years. A friend recommended a specific stock, or they got excited about an investing trend. Some of these investments may still fit into an overall investment plan, and some may not.
What to watch out for
- Tax bills: In retirement accounts, there are generally no immediate tax implications when you buy and sell securities. In brokerage accounts, though, there could be a tax bill associated with selling holdings. If the current value is higher than the basis, the gain is taxable. Depending on the size of the gains, it may be appropriate to set up a multi-year plan to streamline the investments without triggering larger tax bills.
- Cost basis: Since 2011, brokerage firms have been required to track cost basis (what you’ve paid for the stock) on new purchases. If an investment dates back earlier than 2011, there may not be records about when it was purchased, its cost basis, or what happened concerning dividends. Establishing those facts and figuring out the tax bill will require time and effort.
In short, streamlining requires research. You must watch for additional costs, which can include tax bills, and special account rules. The cost and effort may pay off, certainly, but you won’t know that without first doing the research. What if streamlining carries too many costs? The research will at least provide you with an inventory of holdings with all their features understood—and that knowledge will inform your financial plan.
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