Clearly, the title of this article would cause the most battle-hardened fighter pilots and their spouses to blush, with the racy imagery and whatnot… Alas, what we really care about here is the nugget of wisdom that helps turn young fighter pilots into old fighter pilots—Keep It Simple, Stupid (K.I.S.S.)!
Simplicity helps convert ground ops and intercept geometry from a complex orchestration of steps and tactics into the few key actions that get the mission done. Simplicity for your investment portfolio serves the same purpose.
Let’s look at an area of your financial life where complexity may have insidiously replaced simplicity so you can set about pruning back financial overgrowth and put your mind at ease.
Too Many Investment Accounts
When I first started investing as a lieutenant, I opened a new IRA account each year. I felt really clever for naming them “Roth IRA 1999,” “Roth IRA 2000” and so on… in my Fidelity portfolio so that I could keep track of the money over the years. I failed to extrapolate that this could lead to 80+ such accounts for my wife and I over a working lifetime, but I felt very organized.
I thought it had to be done this way because, as I read the rules, you could only contribute $2,000 (at the time) to an IRA. It seemed like that meant that each year’s contribution had to go to a new account.
We can all be forgiven for misinterpreting the arcane rules of the tax code, especially when we’re young and in DIY mode, trying to signature manage the salesman-masquerading-as-a-financial planner parked outside the gate at every base.
Now that you have a star or wreath on your wings, maybe it’s time to thin the herd of unnecessary accounts a bit. Here’s a few pointers:
One Roth and/or Traditional IRA per person is usually enough.
Additional accounts, especially at different financial institutions just add more things to keep track of like:
Usernames and passwords
Most investments (ETFs, mutual funds, stocks, bonds) can be held at any institution, so consolidating is usually a quick (e-)paperwork exercise.
Consolidating extra Traditional IRAs to a single Traditional IRA (likewise for Roth) won’t cause a taxable event if you rollover funds directly between institutions—i.e., don’t take possession of the funds during the transaction.
If you invest in less traditional assets in your IRA, such as real estate, you may need a self-directed IRA. These are not necessarily offered at all institutions, so there are definitely use-cases for having more than one IRA, but you should be intentional about counting noses before buying this merge!
One 401(k)/403(b)/TSP per person is also usually enough.
Most employer plans allow you to transfer assets into their plan. Somewhere in the mix, they’re charging a fee for the account size, so it’s to their benefit to grow account size.
The TSP has unique features that make it worth keeping in a lot of cases, but it can be rolled into an IRA or new employer 401(k) if needed.
If you leave an employer, you can roll their plan into the TSP or your new employer’s 401(k)/403(b).
The TSP and most employer plans also accept rollovers from Traditional and Roth IRAs. This can have additional benefits such as:
Asset protection if your state puts IRAs at risk in a lawsuit
Zero out tax-deferred IRA balance for Backdoor Roth IRA maneuvers
Eventually, you may want to exit employer plans as you prepare to take distributions in retirement. This can help reduce the number of accounts to manage when you’re entering years of potential cognitive decline and/or desire to do account gymnastics.
One taxable brokerage account per married couple is usually enough.
Unlike IRAs and employer plans (TSP, etc.), a taxable investment account can be titled as Joint with Rights of Survivorship (JTWROS) meaning that each spouse owns an undivided share. If one spouse dies, the other receives the account by operation of law with no need for probate or other outside legal action.
If your brokerage account holds “standard” assets like widely-used mutual funds, ETFs, stocks, etc., a single account can streamline your workload.
!!! WARNING !!!
Some assets are “proprietary” and you’ll have to liquidate them in a potentially taxable transaction to consolidate your taxable accounts. There is a retail investing company present in 580% of strip malls that’s notorious for trapping customers into staying with the company using this tactic. Because not every institution will hold proprietary mutual funds from other companies, you could face a tradeoff between:
Pay tax on sale of proprietary mutual funds in order to move/consolidate, or…
Pay higher ongoing fees at proprietary fund company, and…
Maintain multiple investment accounts versus just one.
It may also be an option to wait and hope that a price decline allows you to sell out of a proprietary asset at little-to-no gain to avoid the tax hit. This could be an issue worthy of professional advice.
While excess investment accounts can add unnecessary complexity, I’m personally a fan of multiple checking/savings accounts that can serve as “electronic envelopes” for budgeting—as long as they’re at the same institution and easy to transfer between. USAA makes this particularly easy so that families can set aside money for non-monthly transactions like vacations and repairs without having to mentally segregate cash in a single account. However, tools like “You Need a Budget” (YNAB) can help with this accounting while using a single account, so there are options to maintain limited cash accounts too. Now that interest rates are compelling again, there are even services that will continuously move your money between banks (for a fee) to capture the best currently offered rates.
Cleared to Rejoin…
There are no points for collecting investment and banking accounts at multiple institutions. Rather, excess accounts invite headaches and stress on a good day and tax problems and other risks the rest of the time. Financial realities constantly change, as do the tax considerations and benefits of certain types of accounts. It may make sense to consolidate into employer plans over your working years, but use IRAs alone during your final enroute descent and of course, everyone’s situation is different. Since our brains were designed to process information, not hold it, why add the complexity of remembering data for more accounts than you absolutely need for your situation?
Winged Wealth Management and Financial Planning LLC (WWMFP) is a registered investment advisor offering advisory services in the State of Florida and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training.
This communication is for informational purposes only and is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This communication should not be relied upon as the sole factor in an investment making decision.
Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made will be profitable or equal the performance noted in this publication.
The information herein is provided “AS IS” and without warranties of any kind either express or implied. To the fullest extent permissible pursuant to applicable laws, Winged Wealth Management and Financial Planning (referred to as “WWMFP”) disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose.
All opinions and estimates constitute WWMFP’s judgement as of the date of this communication and are subject to change without notice. WWMFP does not warrant that the information will be free from error. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. Under no circumstances shall WWMFP be liable for any direct, indirect, special or consequential damages that result from the use of, or the inability to use, the information provided herein, even if WWMFP or a WWMFP authorized representative has been advised of the possibility of such damages. Information contained herein should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized.
Share This Story, Choose Your Platform!
Want to know more? Contact us or schedule a complimentary introductory call.
“Winged Wealth Management and Financial Planning LLC (“WWMFP”) is a registered investment advisor offering advisory services in the States of Florida and Texas and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by WWMFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of WWMFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to other parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.