How Consolidation Simplifies Your Financial Life

– by Matt Beardwood, CFP®, Director of Wealth Management

In a frenzied, fast-paced, and rapidly-evolving world, there has been a growing movement in recent years that advocates for simplifying your life. Books, articles, and experts on television all seem to agree that doing things like reducing clutter, managing a pared-down schedule, and placing your focus on the people and things that are most important to you can make you healthier, happier, and reduce your stress.

“In character, in manner, in style, in all things, the supreme excellence is simplicity.”
Henry Wadsworth Longfellow

This principle applies to people from all walks of life. When Microsoft founder Bill Gates was asked what he learned from fellow billionaire Warren Buffett about managing his time, he said it was the importance of giving himself time to think. “You know, I had every minute packed and I thought that was the only way you could do things,” Gates told interviewer Charlie Rose. To prove the point, Buffett produced a small paper calendar that was almost completely blank, emphasizing the importance of managing the demands of a very high-profile position.

The Elegance of Simplicity

No matter where you fall on the economic spectrum, the elegance of simplicity is especially true when it comes to your finances. Credit cards are a great example. With one or two, you can easily track the due date, avoid late fees, ensure favorable and consistent interest rates, and, perhaps most importantly, protect your credit score. With eight or ten cards, however, the task becomes a lot more complicated and can take up time (and money!) that you’d much rather spend doing other things.

Westover Capital - Consolidate to Simplify Your Financial LifeDifferent challenges and opportunities present themselves as you grow and accumulate wealth. In addition to checking and savings accounts, you may also have multiple investment accounts, loans, credit accounts, and trusts that are managed in different places by different people. The effective stewardship of these assets is critical, especially with instruments like IRAs (Individual Retirement Accounts) and 401(k) accounts that are accompanied by very specific tax and legal requirements.

The Advantages of Consolidation

It’s not unusual to have multiple retirement accounts spread across different companies. In fact, we often help clients ensure that they’re in compliance with IRS rules regarding these types of accounts. However, there are some clear advantages to consolidating retirement accounts and simplifying this process.

  • Efficiency – Consolidating several retirement accounts into one is the most efficient way to manage these assets. Instead of calculating contributions and RMDs (Required Minimum Distributions) across several accounts, which creates the possibility of missing one or more, everything is in one place.
  • Savings – If you have one or more advisors managing multiple retirement accounts, you are likely paying separate fees for each account and the activity it generates. Consolidation can save you money on both management and transaction fees. Not only that, but if you don’t revisit accounts from previous companies or positions, your investment elections will remain the same as when you left them. Just like your wardrobe, you probably don’t want your portfolio to reflect choices from the late nineties!
  • Reporting – One of the biggest advantages to combining your retirement accounts into one account is consolidated reporting. It’s difficult to get a full and complete financial picture if you’re trying to interpret it across several different reports and accounts.
  • Compliance – As we’ve mentioned, the IRS is very specific about the treatment of both IRAs and 401(k) accounts. There are different rules that apply to each, and special circumstances that must be taken into consideration to avoid additional taxes and penalties. With a single account, you can be assured that you’re not exceeding contribution limits and that you’re taking the appropriate distributions every year.

You may be wondering what happens when the confusion created by multiple retirement accounts causes an error or breaks IRS rules. The consequences for not taking the correct RMD every year can be costly, with penalties of up to 50 percent. So, for example, if your RMD is $20,000, you’ll be hit with a $10,000 penalty in addition to the tax you already owe.

If you’ve made an honest mistake by not taking the proper RMD, you can correct the error and petition the IRS to waive the 50 percent penalty. In most cases, they will do so.

Fortunately, there are remedies for this situation. The rules accompanying retirement accounts are in place to prevent tax avoidance. If you’ve made an honest mistake by not taking the proper RMD, you can correct the error and petition the IRS to waive the 50 percent penalty. In most cases, they will do so. However, you’ll still be required to amend tax returns for any prior years that were affected by the error. Needless to say, it’s much easier to consolidate your accounts than to wrangle and trade piles of paperwork with the IRS!

At Westover, we help clients simplify their financial lives. If you’re feeling overwhelmed or concerned by multiple accounts and points of contact for your assets, we’re here to help.