Account Consolidation

The average person will have 12 jobs in their lifetime over a span of three to four decades (Zippia.com, May 19, 2021, Chris Kolmar).  During this time, a lot can happen in a person’s life.  Other than career moves, someone may get married, have children, move residences multiple times, divorce, remarry, inherit money or property, and encounter other serious life events that shape who we are as a person.  All these things cost money too.  While you cannot plan for some of these things, you could be better prepared by what you are doing beforehand.
 
One way to be better prepared is to consider consolidating your accounts as you go through life, such as when you change jobs or retire.  There are many types of financial accounts.  There are taxable accounts such as Single, Joint, and Trust, which are not retirement accounts.  There are retirement accounts like Traditional and Roth IRAs (Individual Retirement Account) which the individual manages.  These have more options for investments, more strategies available and, ultimately, more control.  There are also employer sponsored plans like 401Ks, 403Bs, 457s and SIMPLE IRAs, all depending on where a person works.  Not all these accounts should be consolidated into one.  For example, when a person retires, they may not want to withdraw their 401K and deposit it into their savings account at their bank, unless they enjoy paying taxes.
 
However, there are many benefits to consolidating accounts as you go through life.  When money is invested, it’s usually done with a goal and timeframe in mind; a retirement date, buying a home, paying for grad school, children’s or grandchildren’s education, and so on.  When accounts are consolidated, they may be easier to manage and could be implemented into an efficient strategy to reach your goal.  For instance, if you plan to retire by a certain date, do you know how much you will need to save by then in order to live life on your terms?  Congratulations if you do know this amount because that is the first step.  Now that you know that, what is the return you will need from your investments to transform the amount you currently have into the amount required to enjoy retirement and be financially secure?  What is the dollar amount you need to contribute on a regular basis to make this happen?  If you have multiple accounts at multiple establishments working towards one goal it could be difficult to manage, inefficient and probably more costly.
 
If you do not know the answers to the questions above then there really isn’t a plan, may be more like winging it.  The value of a financial advisor is evident in this situation.  It is usually in a person’s best interest to have one trusted advisor or team of advisors at one location where everyone is on the same page and knowledgeable of the client’s goals and financial situation.  They can give answers to these questions specifically for you and your goals, and that’s just on the planning aspect of financial success.  The benefits of consolidating accounts are paramount when it comes to the actual investments and how they are chosen and diversified to seek the returns that are required to reach your goals while also reducing your risk in volatile and precarious times.  If you have two 401Ks and three IRAs floating around, all those accounts are supposed to be working to prepare you for retirement and your goals associated with it.  But are the individual investments in each of those accounts actually doing that?  Are they diversified or are you invested in a lot of the same companies and/or sectors? 
 
When money is left in employer sponsored plans after you have left that company there are strategies available that may be a huge benefit to you that are being missed.  Some employer plans do not offer Roth options within their plan.  When a rollover occurs from a 401K or 403B into a Traditional IRA, it may be beneficial to convert portions each year to a Roth IRA to take advantage of tax-free income in retirement.  This must be determined on an individual basis and a person’s tax advisor should be included in the conversation, but it is well worth talking about.  Another strategy that many people are not aware of is a 72T.  This allows a person to avoid the early withdrawal penalty of 10% tax when a person wants to use their retirement money before they are 59.5 years young.  This is extremely helpful for people that want to retire early.
 
At Majestic Financial we take great pride in giving our clients advice and educating them to develop and implement plans and strategies that are in their best interest.  It would be prudent to share the following information to align with these priorities.  If you've changed jobs or are retiring, rolling over your retirement assets to an IRA can be an excellent solution. It is a non-taxable event when done properly - and gives you access to a wide range of investments and the convenience of having consolidated your savings in a single location. In addition, flexible beneficiary designations may allow for the continued tax-deferred investing of inherited IRA assets.
 
In addition to rolling over your 401(k) to an IRA, there are other options. Here is a brief look at all your options. Be sure to consider all your available options and the applicable fees and features of each option before moving your retirement assets. For additional information and what is suitable for your particular situation, please consult us.
1. Leave money in your former employer's plan, if permitted.

• Pro: May like the investments offered in the plan and may not have a fee for leaving it in the plan. Not a taxable event.

2. Roll over the assets to your new employer's plan if one is available and it is permitted.

• Pro: Keeping it all together and larger sum of money working for you, not a taxable event.
• Con: Not all employer plans accept rollovers.

3. Rollover to an IRA.

• Pro: Likely more investment options, not a taxable event, consolidating accounts and locations.
• Con: Usually fee involved, potential termination fees. 

4. Cash out the account.

• Con: A taxable event, loss of investing potential. Costly for young individuals under 59 ½; there is a penalty of 10% in addition to income taxes.

Lastly, consolidating accounts reduces the stress that comes from keeping track of multiple accounts at numerous places.  Reducing excessive statements and paperwork, tax reporting and a plethora of calls (sometimes to 800 numbers where the investor is a number and not a person with a family with wants and dreams) goes a long way.  Having one source for your financial planning is also helpful as an investor ages.  Keeping track of Required Minimum Distributions (RMDs), which start when a person turns 72, is easier when accounts are organized with a trusted financial advisor.  Also, when the time comes to pass these accounts and the wealth within them, families are very grateful to talk to one source that knew their family member rather than hunting around for statements and making many calls to make sense of things, especially at an already stressful time for everyone. 
 
It could make a lot of sense to consolidate accounts in an organized manner that is designed to optimize the resources that are available.  A person’s life savings is a resource that requires responsible stewardship.  That stewardship should come from one trusted advisor or a team of advisors that truly have the client’s best interest in mind.  Please let Majestic Financial know if you, or someone you care about, have questions about this process or could benefit from a conversation regarding this.
 
​Written by Leon Bennett, Chief Operating Officer, Majestic Financial, Financial Consultant, RJFS

*Any opinions are those of Leon Bennett and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
*Please be aware that the early distribution penalty tax exception, substantially equal periodic payments, available via Section 72(t) of the Internal Revenue Code, is subject to very specific guidelines, and thus, various factors should be carefully considered. Investors should understand the account value (net equity and/or principal balance) could potentially be exhausted if the distributions exceed the earnings and growth of the investment(s) in the account. Also, the ability to sustain substantially equal payments can be compromised if the account is exposed to higher volatility through higher risk or growth-oriented products. Always consult the advice of an independent tax professional prior to initiating 72(t) substantially equal periodic payments.