Do You Need to Simplify Your Portfolio?
By Jonathan Clements, Director of Financial Education, Citi Personal Wealth Management June 26, 2013 04:12 PM
How many financial institutions do you have investment accounts with? If you take more than a few seconds to answer, you probably have too many. Over the course of our lives, we--along with our spouses--might collect brokerage accounts, mutual funds, traditional and Roth IRAs, and perhaps a few 401(k) plans with old employers.
Having all these accounts doesn't necessarily improve our portfolio's diversification or investment returns. In fact, while we may feel safer because we're dealing with a fistful of financial institutions and we own a slew of individual investments, many of these investments may give us the same market exposure, so our portfolio isn't especially well-diversified.
In addition, keeping track of all these accounts can create hassles for us, as well as headaches for our heirs. Because our money is spread across numerous financial institutions, it can be hard to figure out what our overall investment mix looks like and, if it's out of whack, it can be tough to bring our portfolio back into balance. Too many accounts can also complicate our lives at tax time.
Consolidating accounts won't just make our financial lives easier. It could also lower our investment costs. Fewer accounts will likely mean fewer account-maintenance fees. By simplifying, we may also be able to move money out of, say, an old 401(k) plan with high-cost investment options and into lower-expense investments. And by focusing our wealth at one or two financial firms, we may have enough assets to qualify for a higher level of service and a break on account-maintenance fees, IRA fees, asset-management fees and other investment costs.
If you're consolidating old 401(k) plans and IRAs at a single investment firm, consider a custodian-to-custodian transfer, so you can avoid the risk of triggering income taxes and tax penalties. Meanwhile, if you're consolidating taxable-account money, keep in mind that selling investments may trigger capital-gains taxes. That said, you may discover that some of your taxable-account investments have declined in value. Result: Selling may lead to tax losses--and thus simplifying your finances could also trim your 2013 tax bill.
INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
Diversification does not protect against loss or guarantee a profit.
Citigroup, Inc. and its affiliates do not provide tax or legal advice. You should seek advice based on your particular circumstances from an independent tax advisor. To the extent that this material or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
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