As humans, we tend to erroneously believe that if something is simple, we must be missing something. We have encountered that with our Ten Year Rule—a simple investment strategy that aims to protect principal for when you need it while allowing your investments to grow for the long term, possibly providing the ability to wait out a market downturn.
The same can be said for not only how your money is invested, but where it is invested. During your working years, you have a job and invest in your 401(k). Then you leave that job for a new company with a new 401(k). You may have left your old 401(k) invested or rolled it into an IRA. When you leave the new company for better opportunities, you’re faced with the same decision of what to do with your 401(k). Some 401(k) administrators may even roll your old 401(k) into an IRA for you. At retirement, you could easily have six or seven IRA accounts, and it is very likely your spouse has done the same.
Generally it is recommended that when leaving a job, investors should roll their 401(k) into a traditional IRA, as the money will continue to grow tax deferred. IRAs also have a wider choice of investment options that are not limited to the mutual funds available within the 401(k). With consolidated investments, you will likely spend considerably less time trying to track down statements through former employers’ human resources departments—especially if you have moved over the years and forgot to provide a forwarding address. It is also easier to view and control your investment allocation when all of your assets are consolidated into one account.
Merging your accounts is also beneficial as you get older and closer to your required minimum distributions. Required minimum distributions apply to traditional IRAs and IRA-based plans such as SEPs and SIMPLE IRAs, as well as all employer-sponsored retirement plans. Roth IRAs do not require mandatory distributions while the account owner is alive. While your required minimum distribution at age 70 ½ is based on the total balance of all of your traditional IRA accounts, some brokerage firms may make you take your required distribution from each account. If you have one account with a cash balance, which you would prefer to take your withdrawals from, the brokerage firm could require you to withdraw from an account that has your investment in growth instruments. You could end up withdrawing more than you need or selling when your investment is down. Additionally, workplace retirement plans like 401(k)s, and 457(b)s, require mandatory distributions to be taken separately from each account.
Quite often simplicity gives you more flexibility when it comes to your retirement investments, as you should be able to better control your fixed income investments to protect your principal for your liquidity needs in the next 10 years. Moreover, consolidated accounts are easier for your heirs to manage should something happen to you.
If you have questions on simplifying your retirement accounts, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
Disclosures: This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
