You don't need to be told that managing your personal finances can be tough. Virtually anyone reading this will be able to say truthfully that money is tight in their household. Too many things need to be done, and there's not quite enough income to cover everything. So we all make choices. We prioritize. We postpone.
And, with embarrassing frequency, we also blunder.
In this Motley Fool Answers podcast, co-hosts Robert Brokamp and Alison Southwick have invited certified financial planner Josh Strange, the founder of Good Life Financial Advisors of Northern Virginia, to discuss the five most common money mistakes he sees his clients make, and how we can avoid them.
In this segment, he talks about a matter of logistics. If you have accounts spread out across too many institutions, it's tough to get the big picture. And without that, you're liable to make more mistakes when it comes to your financial strategy.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Sept. 03, 2019.
Robert Brokamp: Mistake No. 3. Having accounts spread all over the place.
Joshua Strange: Yes, life's busy. It's hard to keep track of things. We're a transient society when it comes to employment, so people will have old retirement accounts and they're not really sure what's going on with it. They have them spread out piecemeal, so it's very hard to develop a strategy when they're spread out all over. So being able to see everything in one or two places can really simplify things for people and help them have a better understanding of where they're at when it comes to their finances.
Brokamp: As I said in the beginning, we've all made financial mistakes and this is one of mine. I recently rediscovered that I opened a Roth IRA years ago and it's only $2,000. That's what the annual limit was. That's over a decade ago and I'd totally forgotten about it because you have these accounts spread all over the place. You lose track of them.
Alison BrokampSouthwick: Well, that's a fun surprise. You didn't find five dollars in your jeans.
Brokamp: Unfortunately I didn't invest it, so it's still sitting in cash.
Southwick: Oh. It was just sitting in cash for the last 10 years?
Brokamp: I don't want to hear about it. That's a mistake that cost me thousands of dollars. Literally thousands of dollars.
Southwick: That will just make our listeners heartsick. That will make them feel so much better about themselves. That's really kind of you to share that story.
Brokamp: Thank you. Thank you very much. So when it comes to consolidating accounts, it often comes down to saying, "I want to keep all my accounts with maybe one or two providers." A lot of transfers. Things like that. Any tips people should know or traps they should avoid as they do that?
Strange: It depends on the tax classification. If it's qualified money, don't take possession of it yourself. You don't want to say, "Oh, I'm going to take this money out and I'm going to go put it back in."
Brokamp: Qualified meaning a 401(k) or an IRA. Something like that.
Strange: Exactly. Because what happens is that could trigger a taxable event and if you don't handle it right, it's complicated. They withhold some money back and you have to pay it back plus what they withhold, and if you don't have the cash flow it could be really problematic. So you want to make sure you're doing either a direct rollover or a custodian-to-custodian transfer.
I had a client who had a CD IRA at a bank. They went in and they said, "My CD's up. I want to take my money." Well, the banker wasn't that experienced in this, and so they actually just moved it to their money market.
Brokamp: Oof. Did he get taxed on the money?
Strange: And they get a bonus for opening the new money market -- a taxable money market. So I met with this guy. We talked about this. It was over $300,000.
Brokamp: So that was considered a distribution.
Strange: It was considered a distribution. Fortunately, we caught it before the 60 days, so we were able to move it back into an IRA vehicle. The funny thing is this guy didn't become a client because he didn't want to pay for any advice, but I literally saved him $100,000 in a tax bill.
Brokamp: Wow. So that's for transferring IRAs and 401(k)s. Stuff like that. With taxable accounts, it used to be that when you transferred from one broker to another, you risked losing cost basis information. They've implemented some rules that basically the information is more likely to come over. But I still think it makes plenty of sense to print out all that information and get all that information before you move those investments.
Strange: I agree, absolutely. And the IRS -- I think it was in 2011 or 2012 -- made it to where brokerage firms are required to report cost basis so that cost basis will track. But this is the fun part of my job -- when I get to play forensic detective -- and try to help people come up with what that basis was.
One thing I will say is whenever you are transferring non-qualified assets -- meaning non-retirement, non-401(k) -- you want to make sure that you do it in kind, if possible and not just liquidate and sell. And a lot of people don't know this. I was really surprised. You can move investments from one firm to another without selling. It seems that would be common knowledge, but it's not. So if you're moving from one platform to another, you can just transfer those assets in kind. You don't have to sell. It's not a taxable event, but if you do sell, it can be problematic on the tax side, so just make sure you know what you're doing there.
And then if you're looking at things like annuities or life insurance, you want to explore the options of 1035 exchange, which is a way to maintain the tax deferral and tax-free nature of those. Tax free on the life insurance side. Tax-deferred on the annuity side.