King Solomon famously wrote, “It is the little foxes that spoil the vine.” In a secular moment, he might have written: “it is the little assets that spoil the estate plan.”
More often than not, with careful examination, we uncover forgotten assets in a family’s financial situation. They may be overlooked or held in accounts that you no longer check, however, these neglected assets require your attention.
It may be a small 401k from a first job, an old IRA contribution or a stock lingering in a long-forgotten lockbox. While it is easy to focus our attention on larger assets and the current context, investments are not meant to function on autopilot. Tax requirements and investment opportunities dictate at least occasional attention.
When reviewing your assets, some basic rules apply. Generally, a family will have a joint account and a couple IRA’s or retirement accounts. Remember that retirement and IRA accounts must stay in individual names and account holders cannot mix their money with their spouse’s accounts.
If you have three or four small IRA accounts in your name, you can place them in a single account to simplify and generally reduce administrative expense. If you have old retirement accounts, you may be able to move them to your current retirement plan or directly to your IRA.
Orphan accounts and long lost dollars can impact decisions we should be making in any one of five distinct financial areas. These areas are not obvious and it is difficult to understand how they interrelate.
Where do you begin? Always start with the end in mind. For most people, the starting point is their retirement plan. We call it your life after work because most people don’t vacation the rest of their lives after leaving the workforce. Instead, they transition into a new phase.
Tax planning must be done proactively before the end of every year in order to properly determine contributions and financial decisions. Creating and following your investment policy is paramount to getting through the storms and challenges of market movements.
There are also one-off situations that simply accompany life. Some are good and others painful but they are part of the process. Last but not least is the legacy plan that ensures your assets are distributed where and how you want them after you are gone. Allowing orphan assets to exist without recognition can create challenges in each of the five critical financial elements.
When we uncover investment decisions that create tax penalties, more often than not the situation occurred because another account had been totally disregarded. When estate plans fail, it is because accounts weren’t titled correctly so that the documents were unable to function as intended. When insurance policies don’t deliver as expected it is because beneficiary designations were overlooked. Each seemingly minor scenario can create huge holes in your financial future.
Understanding the reciprocal relationship between investments and taxes is key. Just as important is keeping track of what you own.
Tax advice provided by CPA’s affiliated with Financial Enhancement Group, LLC.
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see our Disclosure page for the full disclaimer.
