Stop Me Before I Open Another Account!

Reducing the number of your accounts can provide a clearer view of your overall financial picture, supporting greater confidence and control.

Hello, I’m Luke, and I’m addicted to credit card points. I have one credit card for groceries, another for restaurants, one for gas, and a fourth for everything else. This behavior is normal, according to data from Experian, which has found that the average American has four active credit cards. But this collection of credit cards probably consumes more of my brainpower than it’s worth.

Having multiple bank accounts is common as well. I have clients who came to me with a dozen accounts spread across multiple banks. Primary checking, primary savings, money market, CDs, an account for the kids, and so on. Generating meaningful interest can’t be the motivation, for the savings accounts anyway – which currently pay, on average, just 0.4 percent interest.

Another place I see bloat is retirement and investment accounts. I’m guilty of this one too. People often have one or more old 401(k) or 403(b) plans, one or more traditional IRAs or Roth IRAs, and perhaps several brokerage accounts. This proliferation makes investing more difficult, in large part by making it harder to apply an orderly asset allocation.

Then there are those who’ve inherited IRAs from parents who never consolidated their IRAs – leaving their beneficiaries with two or three additional inherited IRAs. These IRAs could all be rolled into a single account, but inertia tends to keep them split up.

With all the various financial accounts – credit card, bank, loan, brokerage and retirement – no one could blame you for not having a clear financial picture.

Allow me to make a brief pitch for simplifying your financial life. Consolidating investment accounts is one of the first things we do for new clients, and it creates a great sense of accomplishment with relatively simple paperwork.  

Especially as you approach retirement, it can make life easier if you transfer all your accounts to a single custodian.

For example, employer retirement plans such as a 401(k) or 403(b) can be moved into a single rollover traditional IRA, along with any other old traditional IRA, Simple IRA, and SEP-IRA. (Note that assets from a Roth 401(k), Roth 403(b), or Roth IRA can be rolled into a single Roth IRA as well, though these are not titled “rollover” accounts).

Combined with a brokerage account and a Roth IRA, you can probably get away with having no more than three investment accounts in your name (married couples may have double that number as IRAs cannot be held jointly).

Consolidation may end up saving time and effort. Moving accounts to a single custodian makes it easier to track investments and monitor performance. Moving accounts from old workplace retirement plans such as 401(k)s into a rollover IRA allows for more investment options and may help reduce your investment-related expenses.

Having just a handful of accounts also simplifies taking withdrawals during retirement, thereby making it easier to manage your income. As you get older, the IRS requires you to take out a minimum amount from tax-deferred IRAs each year (currently starting at age 73). If you still have such IRAs spread around in different places, you run the risk of missing one of these required minimum distributions – and possibly paying hefty penalties.

Having all your accounts in one place can help provide a clearer view of your total retirement savings, helping you plan better for your retirement goals. Consolidation can also help streamline tax reporting.

Finally, consolidating accounts allows you to better and more easily manage your estate plans – for instance, should you want to name or update a beneficiary.

Some are wary of consolidating accounts at a single firm such as Charles Schwab or Fidelity out of fear that these institutions could collapse. If that includes you, keep in mind that these custodians do not hold your assets on their balance sheet. The accounts and assets you hold are your own. They are not the property of the custodian. Even in the unlikely event that the custodian fails, creditors cannot go after your accounts.

In a world that usually encourages us to add more – more accounts, more options, more complexity – there may be value in doing the opposite. With fewer accounts to monitor and a clearer view of your overall financial picture, you gain confidence and control. Simplifying your financial life isn’t about giving anything up. It’s about making smart, intentional decisions with what you’ve already worked hard to save.

Luke Delorme, CFP® is Director of Financial Planning at Tableaux Wealth in Great Barrington, MA (www.tableauxwealth.com), reachable at luke@tableauxwealth.com. To stay current on the Squared Away blog, join our free email list.

This blog post is for informational and educational purposes only and should not be considered financial advice. Consult a qualified professional for advice specific to your situation.