En español | When you're trying to focus on what's important in life — financially and other-wise — clutter is your enemy.
The more accounts, monthly statements and investments you have, the harder it is to see the big picture of your finances. Complexity makes it easier to lose track of your money. It creates more paperwork at tax time, and it sows greater confusion for your older self and for your loved ones. Plus, those multiple accounts may be costing you unnecessary fees.
With all the IRAs, bank accounts and credit cards you've accumulated over the years, financial clutter may have crept up on you. Here's how—and how much — to trim it back.
Trim back to: 2 cards
One is for day-to-day use—and you really need only one. The second card is for storing somewhere safe at home so you don't get stuck if you lose the first one. That backup card should be from a different issuer than the company that offers your primary card, suggests consumer advocate and radio host Clark Howard, in case one or the other lowers your credit limit or even cancels your card. Why not more than two cards? The more you have, the harder it is to track your spending, says Dan Ariely, a Duke University economics professor.
Simply go online or call the issuers to cancel cards you rarely use. If you have any automated payments charged to these cards, such as for phone or cable service, switch the automated payments to a card you plan to keep. Then cut your old cards into confetti before tossing them.
As illogical as this may sound, whittling down the number of credit cards you hold can hurt your credit score. This is typically only temporary, though the impact may linger if you have large balances on your remaining cards. You can estimate the impact of closing an account by using a score simulator on a free credit-monitoring website such as Credit Karma or NerdWallet.
Adding Up the Clutter
These are the average numbers of accounts and funds Americans have. Many of us have more.
- 2.8 Bank and credit union
- 4.5 Credit cards
- 1.8 IRAs and 401(k)s
- 7 Mutual funds
Notes: Figures for credit cards, retirement accounts and mutual funds, respectively, are for adults who have at least one. The retirement-account figure is for workers ages 55 to 64.
Sources: Mercator Advisory Group, Nilson Report, Center for Retirement Research, Investment Company Institute, AARP calculations
Bank or Credit Union Accounts
Trim back to: 1 or 2 institutions
It makes sense to have a local brick-and-mortar bank for in-person deposits and withdrawals. But any money you park there will probably pay you very little interest. That's what your second bank is for — an online bank that will likely pay a better interest rate. Though you may not want to close other accounts because you think you'll need them someday, it's more likely that they'll sit there earning no interest, eventually forgotten, and maybe even eaten away by monthly maintenance fees.
As with credit cards, you may have given a company, such as your cellphone provider, permission to debit your account, so make any necessary changes before closing it. Have the financial institution send you a check for your balance. And to avoid any unpleasantly surprising monthly fees, ask for confirmation that the account has been closed.
If you end up with two accounts, link them so you can send money back and forth relatively quickly.
You may have good reasons to have more accounts, such as needing to separate funds for estate planning purposes. Still, you can just add an account at a current bank rather than going elsewhere.
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Individual Retirement Accounts (IRAs) and 401(k)s
Trim back to: 1-4 accounts
If you collect too many tax-advantaged retirement accounts — and too many different investments in those accounts — you end up with a jumble that makes it harder to manage your portfolio and your withdrawals. So, consolidating them makes sense, with one major caveat: You don't want to combine traditional accounts and Roth accounts.
Traditional IRAs and 401(k)s typically contain contributions you didn't pay taxes on up front; instead, you pay taxes when you pull funds out. Roth IRAs and Roth 401(k)s are pretty much the opposite: You paid all necessary taxes before you deposited money, so you generally won't have to pay taxes on withdrawals. But if you combine Roth accounts with traditional accounts, you could pay taxes twice on the same money.
Aim to move your investments into an account that offers the lowest fees — compare the expense ratios of the funds on the menu — and the most diversified funds. This might be your 401(k), especially if you're in a large plan, or it might be an IRA at a major mutual fund company. You can usually roll a 401(k) established with a former employer into an IRA; it's possible, but not as likely, that your current employer's plan will accept your transfer of an IRA or a 401(k) from another job.
In any case, the easiest way to do this is to contact the company or retirement-plan administrator where you want your money to end up; that firm will help initiate the transfer. Always do what's known as a direct custodian-to-custodian transfer, meaning that any checks are made out to the receiving institution, never to you personally. Otherwise, a slight mix-up might incur heavy taxes.
You may need to sell some or all of the securities in the accounts you close and transfer cash instead. Unfortunately, there's a risk that in the stretch of time between when you cash out and when you reinvest in your new account, you'll miss out on a major market rally.
Trim back to: 1 investment account and fewer investments
Having fewer accounts, and fewer investments within those accounts, makes it far simpler for you to see your entire portfolio.
Move investments to a brokerage offering low or no fees. So you don't have to sell your securities and repurchase them at your new brokerage, consider telling the firm receiving the assets that you want to transfer them “in kind.” The brokerage will start the process. You might also simplify by investing in a few broad low-cost index funds.
It's possible that the new brokerage can't hold a security you now own. If one or two fall into that category, you can either keep those at your old custodian or sell them.