Lessons from the Pros

Featured Article

Keep It Simple and Consolidate Your Retirement Accounts

If you are a typical investor, you likely have three or four different retirement accounts. It is not unusual for someone who is making his or her annual contribution to open a new IRA each year with a different custodian. For example, someone may open a Fidelity IRA one year and a Merrill Lynch the next, just to invest in a mutual fund available through that particular family of funds.

It is also very common for an individual to allow his or her retirement funds to remain in the employer plan, such as a 401(k), 403(b), or the pension plan, after he or she leaves the company. Many people do not realize that these funds can be rolled over to an existing IRA. Since company plans typically offer only a limited number of investment options, by rolling over you can increase your investment selection while reducing the number of accounts.

All deductible and non-deductible traditional IRAs can be combined. The exception is a Roth IRA. You cannot consolidate funds from a Roth IRA with a traditional IRA. These accounts must remain separate.

Why consolidate? Having multiple retirement accounts may cause you to have duplication in your portfolio where you may have similar investments with similar objectives. Consolidating your retirement accounts into a single account makes it easier to manage your asset allocation and avoid costly mistakes. Having one account makes it easier to re-balance your holdings as the markets shift, keeps your paperwork centralized, lowers your overall fees, helps to create better service as you now have a “super-account” and makes it easier for you to calculate the required minimum distributions (RMD). Lastly. It helps your loved ones to locate your savings faster.

How to consolidate your accounts: Step-by-Step

1. Create a list of all your retirement accounts including their current balance, their performance, their fees and the type (401K, IRA, Roth-IRA, SEP-IRA, etc).

2. Figure out your retirement needs and goals (estate planning, cash flow, capital preservation, etc.)

3. Identify the plan/institution that suits your goals and investment philosophy (pay attention to fees, performance, and customer service).

4. Alternatively, you can take the self directed approach and create your own Self Directed IRA (contact OTA Tax Pros for more information).

5. Start rolling your accounts to your institution of choice or to your Self Directed IRA.

6. Start with the small accounts first, then rollover the non-performing accounts or the accounts with higher fees until all accounts have been rolled over.

7. Allocate your funds based on the goals and investment strategy as you laid out earlier.

8. Manage your one account.

When does consolidation make sense? Consolidation makes sense to all who want to benefit from a more simple and efficient process of managing their account. You will have only one statement to deal with, your fees will be lower, and you will be able to allocate and/or re-balance your accounts easier, one simple calculation for your RMD. A Rollover IRA has almost unlimited investment choices. On the other hand, a 401k plan has limited options, most have between 5 to 25 investment choices. More options are better, and Rollover IRA can have many more options than 401k plans.

A Rollover IRA is better from an estate planning view. If you die before taking minimum distributions at 70 1/2, your named non-spousal heirs have the option to take your IRA assets and move them into IRA accounts under their name and extend the minimum distributions to their life expectancy. This gives your heirs the power of tax deferral over their lifetimes. There is not such opportunity with a 401k account held at the time of your death.

A Self-Directed IRA LLC plan offers the most options, control and flexibility. It allows you to have different investments and deploy different strategies under one roof. Self-directed IRAs are not limited to the normal group of asset types (stocks, bonds, mutual funds, etc). There are many possibilities for self-directed IRAs including mortgages, options, futures, LLC’s, partnerships, tax liens, real estate, land, notes receivable and many other investment forms.

For more information on how to properly set a Self Directed IRA LLC contact one of our tax professional at OTA Tax Pros (1-855-OTA-PROS).

Last word. Avoid funds or investments that are not clear to you. There may be many complex investment strategies or assets that are not familiar to you. Keep it simple. If you understand it you can monitor it and know when is the time to pull out or get in.


DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

Join over 170,000 Lessons from the Pros readers. Get new articles delivered to your inbox weekly.