Technology has eased the burden of tracking multiple financial accounts from work to college credit unions of the past. The ease of reporting should optimize the utilization of the resources. One consistent behavior I have witnessed in my 35 years is observing individuals create financial orphans – left-behind or forgotten accounts with balances deemed insignificant compared to their other resources.
The forgotten asset could be an old 401(k) plan or IRA. Perhaps it was even a $25 dollar-a-month contribution into a mutual fund. Not only are these orphans potential tax traps now and certainly in the future, but the lack of coordination with other assets creates tremendous inefficiencies in a financial plan.
Retirement accounts will eventually have obligatory distribution requirements. Regardless if you opened the account at age 25 or 55, RMD’s (Required Minimum Distributions) will be mandatory as you age. Prior to Secure Act 2.0, there was a penalty assessed for missing distributions. Provided you “told on yourself” for missing a distribution in a previous year, I never witnessed the penalty being assessed. The new law will require a mandatory penalty for failure to withdraw.
The retirement planning laws become more conducive to consolidation as time passes. Should you leave a job with a company retirement plan, you often have three choices: leave the asset in the current plan, assuming account balance minimums are met; roll the assets to a new or existing IRA; or roll the asset to a company plan at your new employer. The choice can be obvious, but not always automatic. We have recommended each of the different options to individuals already this year. Every case is unique, and optimal solutions don’t always fit into tidy flow charts.
The challenge with financial orphans is not necessarily in the account itself, but rather the lost opportunity to maximize other options. By combining accounts, you reduce complexity for yourself; increase account sizes, which can reduce your exposure to fees; and at the very least require less time for you or a manager to oversee that your investments match your current objectives.
Legacy planning may not be on your radar as a young person changing jobs, and that is understandable. The challenge is that bad things do happen to good people, and being financially prepared entails a list of assets, account numbers and locations. You wouldn’t want to have to play a scavenger hunt to find your parents’ secret accounts, nor does anyone need that frustration with your resources. A little time from you today can save your family hours of frustration at the worse possible time.
When statements arrive in the mail, even those that seem to be relatively small and appear not worth your time and energy to inquire about, please think again. Don’t abandon your hard-earned dollars! Pay attention to 1099 tax forms and emails that have account numbers. Financial orphans are easily rescued, at the very least, easier for you to rescue than a surviving spouse or child.
Financial Enhancement Group is an SEC Registered Investment Advisor. Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory services can be provided by Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.