In the last post, I discussed consolidating checking and savings accounts. Now I will continue and talk about consolidate investment accounts, both taxable and non-taxable.
Step 3: Consolidate non-taxable accounts
Non-taxable accounts include 401k, IRA, Roth IRA accounts. It’s easier to consolidate compare to the taxable accounts for two reasons 1) you can do different rollovers, most online brokerage houses offer straight forward process to do this on line directly. 2) transactions within these accounts do not trigger taxes so you have one less thing to worry about.
You may ask, why do you have so many 401k account, well, it’s because when hubby and I changed jobs, we didn’t roll over the 401k accounts and left where it is, over time, we collected many of these accounts, most of them poorly invested. When consolidate the previous employer’s 401K accounts, there are two options without any tax consequence,
- Rollover previous employer’s 401k into a Rollover IRA account
- Rollover previous employer’s 401k into the current employer 401k account
401K accounts often has limited investment options, and often carries higher expenses. To learn more on this topic, read Dan Soln’s Smartest 401k book you’ll ever read. In my opinion, option 1 is by far the better option. This is a pretty straight forward process, especially if you are staying with the same brokerage house, in our case, Fidelity. Everything can be done on line. I spend about 30 minutes to consolidate all the accounts. Of course, I can’t combine my hubby and my account, we each had our own account. If you want to move the money to another brokerage house, it’s a little more complicated. You will need to create a rollover IRA account first, then call the current brokerage firm and ask them to distribute the money to you, payable to the new rollover account. When you received the check, then send it to the new rollover iRA brokerage house with the appropriate paper work.
One of the questions here is what to do with the investment in the 401K. Again, there are two options:
- Keep the investment as it
- Liquidate and re-invest in something different.
My recommendation here is option 2, it’ll give you a clean slate to work with. Since the account is non-taxable, there is non tax consequences to worry about. The transaction cost should be minimum, if anything. Do watch out for any early redemption penalty though depending on the fund. Since I haven’t finalized my asset allocation, I decided to liquidate and put the money in a prime money market account for the time being. For the current employer’s 401k account, you cannot roll that over, keep it as it.
Our IRA account is pretty clean, For each of us, 1 Roth IRA, 1 Traditional IRA, and now 1 Rollover IRA. You may ask why keep separate traditional IRA and Rollover IRA. The reason is backdoor IRA where I can not mix the fund. I’ll discuss backdoor IRA in a future post. If you want to learn more now, go to <<the finance buff backdoor IRA>>
- Closed: 4 401K accounts
- Open: 2 Rollover IRA accounts
Step 4: Consolidate brokerage accounts
We have a lot of brokerage accounts collected over time. The first thing I wanted to do was determine which brokerage houses I want to stay with. I decided to stay with Fidelity and Vanguard.
I picked Fidelity a few reasons: 1) we already have a lot of assets with them 2) their customer service is excellent 3) they have a very comprehensive range of brokerage and banking services, from credit cards to stocks, options and everything in between. For example, I have both of their Fidelity investment reward visa and American express card, no annual fee, and 1.5% -2% cash back for all purchases. While you can buy just about any stocks, bonds, options from Fidelity brokerage, it’s not suitable for day/short term trading, the fund settlement is multiple days. Whereas when I was using Datek way back when, it was immediately. Since i don’t plan to do much short term trading, this wasn’t a problem for me.
I picked Vanguard for a few reasons 1) access to the famed Vanguard index funds are well managed and has the lowest fees anywhere, while you can buy Vanguard funds from other brokerage houses, you will likely pay extra fees. As I will discuss in the asset allocation post later, I’m a big believer in index funds and why not go directly to the source 2) while the changes of Fidelity going belly up is minuscule, I don’t want to have all my eggs in one basket.
When consolidate taxable accounts and moving investments from one brokerage house to another, it’s a little tricky as buying and selling investments could have significant tax consequences. Depends on what you hold, there are a few options:
- Transfer in kind – In this option, you are transferring the investments as is from brokerage house to another. For example, in my ETrade account, I held mostly Vanguard index funds, and I just filled out the transfer in kind form and moved the money to Vanguard. This option may not be available everywhere and for all your investments. If you have a lot of gains with your investment, use this option to avoid tax.
- Liquidate and transfer cash – In this option, you liquidate the investments to cash in the current brokerage account, and then transfer the money to new brokerage house. For investments with small gains or loss, this is suitable. In doing so, you may be harvest some investments losses to write off investment gains. For some accounts, we had mostly cash sitting there, it was pretty straightforward.
- Closed: 4 brokerage accounts
- Open: None
Step 5: Link the account for electronic inter bank transfer
This was tedious but necessary. I want to make sure we can move the money around easily between the various banks. Mostly, it’s flowing from our daily checking account (Wells Fargo) to Vanguard (Long term investments) and Capital One 360 (Rainy day fund and project fund). Once this is done, I can move money between different accounts easily and quickly from my computer without having to write paper checks.
- Close 12 accounts all together
- Put 2 accounts into inactive
- Create 2 new accounts.
All in all, we are down to 2 brokerage account, 3 sets of saving/checking accounts, and 6 non-taxable accounts (3 for me, 3 for hubby). It’s a pretty karthitic experience to have this wrapped up, i also felt “richer”, with the money consolidated into fewer accounts where some of them have been out of sight for years, it’s almost like finding “free money”.