The importance of simplifying accounts

Lost Accounts

As the years go by, you may move once, twice, or a dozen times, and forget some of the outstanding accounts you have created. Without any "action" in these accounts, institutions may not be able to find you, and then they will turn over your little pot of gold to the state.

Tax Preparation

In addition, with non-retirement accounts, you will have many outstanding tax forms which can make preparing tax returns more complicated and expensive. Did your grandmother gift you that one share of Disney and now you receive a 1099 for $1.37 for the year? Not only do you have that hassle with that 1099, that one share of stock will also go through probate when you die.

With many institutions providing tax forms online, you may forget to download the form only to be reminded a year later with a fun letter from the IRS letting you know about underpayment.

Retirement Plan Distributions

Most retirement plans have required distributions at age 70 ½. If you have multiple retirement accounts, it will be important to keep track of the required amount that needs to be distributed from all the accounts total. IRA accounts are calculated separately from 401k and 403b accounts. By consolidating accounts, it makes distributions much easier to track. And given the penalty for not taking a distribution is a hefty 50%, you don't want to mess this up.

Ease of Future Financial Caretaking and Estate Administration

The more assets you have floating out there, the more work that will be required by your financial caretakers if you become incapacitated and by the executor of your estate if you die. This increases hassle, costs, and the risk of mistakes.

So how do you simplify?

Before simplifying, make certain you understand the tax and estate implications of your current situation. After that is clarified, begin to pare down the number of accounts to the following:

  • One checking and one savings account at one institution.
  • One IRA account and all old retirement plans such as 401k and 403b accounts should be rolled into this IRA.
  • One Roth IRA account (if you can have a Roth) – and all Roth 401k and Roth 403b contributions should be rolled into this Roth.
  • One brokerage account - all outstanding stock certificates, direct mutual fund holdings, and other investment accounts should be held in this account.

In addition, if you think there are accounts that you have forgotten about, check the unclaimed property site in the state you think it may be located. The website has a great resource for this.

When you consolidate, check the titling and beneficiary designations to make certain they are congruent with your estate plan and your wishes.

By simplifying, you can ease your financial caretaking as you age and save you and your family money and angst in the process.