Is your money in the right place?

When it comes to investing, you have two big decisions to make: What to buy, and where to buy it. As for the former, you have all kinds of choices: cash, bonds, stocks, funds, real estate, and a piece of carpet from Elvis' jungle room (yes, I have a piece — at least, that's what the guy who sold it to me said it was). Regarding the latter, most people have just three general options: a traditional retirement account, a Roth retirement account, and a regular investment account. This article is about the second category — how to make the most of your investment accounts.

Stop the Sprawl

If you're like many investors, you have accounts spread throughout the financial services industry: an IRA or two here, a brokerage account there, perhaps a 401(k) still with a former employer. If you're married, your spouse probably has a lineup to match. By consolidating as many of those accounts as you can with a single provider, you'll unclog your mailbox and make tax time easier — and you can even make your portfolio fatter, thanks to these advantages:

  • Find a better balance. Determining your asset allocation can be tough when you have to look at lots of statements. Rebalancing across several accounts gets tricky; for example, you can't sell the bonds in your 401(k) to buy stocks in your IRA.
  • Move money out of mediocre (or worse) accounts. This is especially true of money left in retirement plans from former employers, which often have limited investment choices at high costs.
  • Get extra services and discounts. Financial companies lure big accounts with lower fees, plus planning services such as a portfolio analysis or access to a Certified Financial Planner.

Find the Best Provider

Choosing a company that deserves the honor of holding your nest egg depends on your style of investing. Here are guidelines based on your investments of choice:

  • Mutual funds: You can use a single fund family or go with a fund “supermarket” (such as Fidelity, Schwab, or TD Ameritrade) that offers access to thousands of funds from many families. The former is the simplest and possibly the cheapest. The latter offers far more selection.
  • Funds and individual stocks: Check out the big brokerages that allow you to buy stocks as well as choose form thousands of funds. Look for reasonable stock commissions and a lineup of no-load funds labeled “NTF,” for “no transaction fee.” The Fool's Broker Center compares the options from several providers.
  • Stocks and ETFs: Look for the cheapest trades. Many brokerages, including Fidelity, Schwab, and Vanguard, offer free trades on some ETFs.

To Roth or Not to Roth?

By investing after-tax money in a Roth account, you trade a tax break today for one tomorrow, as your earnings and withdrawals will be tax-free. Here's a rule of thumb: If you'll be in the same or a higher tax bracket when you retire, go with the Roth.

There is no longer an income limit for converting traditional accounts to Roths. The converted amount gets added to your taxable income in the year you make the move, so if your traditional account is down significantly and you're contemplating changing it to a Roth, you may want to convert some while the account is down. (Check out this article to hear from several financial planners about why a Roth conversion might make sense, though the option to spread the tax bill over two years was available only in 2010.)

The Right Investments in the Right Accounts

Don't overlook the art of asset location — deciding which investments to put into which types of accounts. You want to put the most tax-inefficient investments in the accounts that have the most tax advantages. Here's a summary of what should go where:

  • Roth accounts: Stocks with a higher potential return (such as small-cap stocks and emerging-marking stocks) and real estate investment trust (REITs).
  • Traditional tax-deferred accounts: Slower-growth stocks, commodities funds, Treasury inflation-protected securities (TIPS), and bonds (though, given historically low yields, the argument for keeping bonds in an IRA is not as compelling as it used to be).
  • Taxable, non-tax-advantaged accounts: Low-yield stocks you plan to hold for several years, low-turnover stock funds (such as many index funds and ETFs), municipal bonds, and savings bonds and I bonds.

Those are general guidelines, and can be affected by several factors, such as when you'll need the money and your ability to pick the stocks that will have the higher return (a difficult task, indeed). For example, keep money that you need before age 59 ½ out of retirement accounts since early withdrawals from an IRA or 401(k) may result in a 10% penalty (though there are exceptions). But they're a good starting point.

Have a Recommendation?

As for which brokerage, fund company, or online bank to choose, I'll leave that to you readers. Have any particularly good or bad experiences? Are you happy with whomever's holding your money? Let us know.

Final note: Don't forget to get your free Slurpee today! You see, today is my birthday, and in honor of my Womb Liberation Day, 7-11 stores are giving away free 7.11-ounce Slurpees from 11 a.m. to 7 p.m.
More about...Investing, Retirement

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savnmypennies
savnmypennies
8 years ago

I need help with this!! I currently moving and updating addresses, and in the process have compiled the following list of my financial services providers. Yikes! What opportunities do you see for consolidation? Wells Fargo (initially Wachovia) – 401(k) from former job Computershare – ESPP from former job Edward D Jones – brokerage account used for grad school expenses Vanguard – Roth IRA started in 2011 Fidelity – current employer’s 401(k) First Citizens Bank – personal checking & savings Bank of America – personal credit card Wells Fargo – joint check & savings accounts (w/ spouse) Not to mention HSA’s,… Read more »

Debbie M
Debbie M
8 years ago
Reply to  savnmypennies

Can you roll over your retirement plans from former jobs (assuming you like Vanguard or Edward D Jones)?

You could use just one bank for your personal accounts, your joint accounts, and your personal credit card, but canceling your old credit card may hurt your score and I’m a fan of couples having two different banks (in case one does something weird, you have a back-up).

chacha1
chacha1
8 years ago
Reply to  savnmypennies

If your primary concern is to declutter, I would recommend rolling over all the previous 401(k) type accounts into your current 401(k) with Fidelity. Then, unless you are at a point of fully funding the 401(k) and having money left over to fund the Roth, I’d consider rolling over the allowable amount of your Roth (i.e. your contributions to it, which you’ve already paid tax on) into your HSA. If your contributions have really grown this might not be a workable option; mind hadn’t. And I’d quit using FSAs. If you have an HSA, you are much better off using… Read more »

Rosa
Rosa
8 years ago
Reply to  chacha1

why Fidelity over Vanguard?

We’re looking to consolidate too, and Vanguard seems to have much lower fees.

mary w
mary w
8 years ago
Reply to  Rosa

I think he suggested Fidelity becuase that’s where the current employeer 401k is and he has no control over that.

Jay
Jay
8 years ago
Reply to  savnmypennies

The only advice I would offer is to dump, as fast as you can, Wells Fargo! They are the new evil empire (although I can’t remember the old! lol).

Tyler Karaszewski
Tyler Karaszewski
8 years ago

I’m 31. How do I know (or even guess) what tax bracket I’ll be in when I retire? I am currently in the 28% bracket and enjoy the tax break.

Jerome
Jerome
8 years ago

There is no way to be sure. But if you are in a high tax-bracket, chances are good that that will be so in future. Especially if you are deep in the highest tax bracket. And conversely, if you don’t pay any taxes now due to low income, chances are unfortunately pretty high that that will be so in future. Just keep your affairs up-to-date once in a while ad you will be OK.

Bella
Bella
8 years ago

I’m also a little confused on the Roth advice. I was under the impression that for a Roth account – you already paid taxes on the money going in – then when you withdrawl – the additional earnings are tax free. So it’s a win no matter what the tax bracket now or later.
Are we talking about converting a 401K to a Roth? We rolled our 401Ks over to IRA accounts (non Roth), in order to consolidated them – and had no tax implications.

Eric
Eric
8 years ago
Reply to  Bella

Pretty sure he is talking about contributing to a Roth IRA instead of putting that money in a 401k where it’s not taxed until you withdraw it. I put some money into both since I really don’t know what the tax rates will be in 25 years.

Michelle
Michelle
8 years ago
Reply to  Bella

A with a Roth IRA, you pay the taxes when you put the money in. With a traditional IRA, you pay the taxes when you take it out. If you’re 25 and only making 40K a year, a Roth IRA makes sense. You have a low tax liability right now. However, if you’re making 100K a year, it might make sense to use an IRA. Because if you can invest 10K-15K in your IRA that year, your taxable income will only be 85K-90K this year. This will result in a lower tax bill this year. When you take money back… Read more »

KSR
KSR
8 years ago
Reply to  Michelle

Annual contribution max for any type of IRA is $5000 (not including catch up
contributions for age 50+). Annual employee contribution max for a 401k is $17,000.

Michelle
Michelle
8 years ago
Reply to  Michelle

OK, thanks for the clarification. I knew that you could only contribute 5K to a Roth. I wasn’t aware that it’s the same for the traditional IRA. (I’m still in my 20’s, so I’ve never looked into getting a regular IRA.)

getagrip
getagrip
8 years ago
Reply to  Bella

Bella, assume your highest tax bracket is the 25% bracket. If you take $1000 of your salary for retirement as a basis. Then put it towards a Roth, you pay $250 in taxes and put in $750. If you use an IRA you put in $1000, and figure your taxes this year with earnings of $1000 less, hence not paying the $250 in taxes. Then the Roth $750 earns interest at 5% for 35 years and is worth $4137 while the IRA $1000 is worth $5516. If you are still in the same tax bracket of 25% when you withdraw… Read more »

chacha1
chacha1
8 years ago

Me too. Since I’m not even close to fully funding my 401(k) I don’t think it makes any sense to also try to fund a Roth when I have no earthly way of knowing what my tax obligations are going to look like in 20 years.

Debbie M
Debbie M
8 years ago
Reply to  chacha1

I have no trouble guessing whether my marginal tax rate will be higher or lower when I’m using my (Roth) IRA. I’m in the 15% tax bracket. I don’t see my income plummeting down to the 10% bracket. And I don’t see taxes going anywhere but up in the future with all our debt problems. (Just because I have no trouble guessing doesn’t mean I can’t be wrong. They could decide to lower income taxes and raise sales taxes or property taxes or some other tax that I will still be paying.) Also, I’ll be getting a pension that’s taxable,… Read more »

Nicole
Nicole
8 years ago

Given the current government situation and future obligations, I’m gonna assume that marginal tax rates are going to be higher for everyone in the future… how soon in the future is an open question.

And I thought that was a great reason to put money into Roths, until I was at a conference and one of the speakers suggested that the gov’t might renege on its Roth taxation promises (and that’s why he diversifies across Roth and traditional). Surely the gov’t wouldn’t do *that*.

Debbie M
Debbie M
8 years ago
Reply to  Nicole

I can see them disallowing people putting more money into Roths at some point, but not reneging on money that’s already in there.

Except in some kind of disaster scenario. But then they could just as well reneg on regular accounts and make you pay taxes after all.

CA
CA
8 years ago

Another issue is that even if taxes go “up” (which everyone seems to expect), the rates may actually go down as deductions are eliminated. As such, it may get a little more complicated than current bracket v. future bracket, but it’s almost impossible to predict tax reform over the next 30 years or so.

That said, we make too much money to use a traditional IRA, but we’ll max out a Roth 401k and a traditional 401k to act as something of a hedge.

Lance@MoneyLife&More
8 years ago

Very good tips on utilizing tax advantaged accounta. I personally use Vanguard for my investments outside of my employer sponsored plan. I really like their low fee structure and investment options in the vanguard family of funds.

Katie
Katie
8 years ago

Honestly, a lot of this is over my head (I get overwhelmed when I think about which investments should go in which accounts), but I love Vanguard. I just use their Targeted Retirement Accounts and they are great. The Vanguard customer service is also awesome and they have always taken the time to explain the different accounts, benefits, etc. Highly recommend!

getagrip
getagrip
8 years ago
Reply to  Katie

Save in something reasonable now, worry about the details and tweeks later. For every person who will loudly tell you you did it wrong, there will be ten or more silent ones that wished they’d saved half of what you did.

Deborah
Deborah
8 years ago

My banking is done with a local credit union offering no-fee checking, automated bill pay options, and a summer savers account that pays an amazing 3% interest. Mortgage is with Wells Fargo, which is not my preference, but I don’t want to refi just to move it to another institution. 457b is with TIAA-CREF. ROTH and Traditional IRA’s are with Vanguard, as is a non-retirement municipal bond fund. I also have some I-bonds purchased via TreasuryDirect. Low fees, good service, and solid financial reputation/standing are my litmus test for financial matters, and both TIAA-CREF and Vanguard are known for all… Read more »

Rosa
Rosa
8 years ago
Reply to  Deborah

it’s only worth doing if it saves more than the refi fee, but we refinanced through our credit union, to get away from Wells, and we’re very happy.

It took going from a 30 year to a 15 to make the savings worth it, but interest rates are even lower now than a few years ago when we refi’d.

mary w
mary w
8 years ago
Reply to  Deborah

Refi-ing to get away from a particular lender/servicer is definitely not worth it. Loans get bought and sold all the time and banks get gobbled up by other companies. Years ago I did a refi with my credit union and within a year the loan was sold to BoA. Ugh.

Jeff
Jeff
8 years ago

interesting timing, i just rolled my old employers 401k into a traditional IRA with Vanguard last week to avoid the tax bill now but give me much better investment options and super low fees.

going forward i plan to start a roth IRA, that way i’ll be hedging my bet on whether current taxes or future taxes will be higher.

any advice would be appreciated, thanks.

Bella
Bella
8 years ago

My question for you, are there any good rules of thumb for when to start moving from 401K to a regular investment account? should it only ever be if you’re saving more than the max per year – ie: first 33K of savings (2 income family) goes into 401Ks and everything after that is investment account? I’m just wondering as our 401Ks are growing quite large and I suspect we’re getting to the point that we won’t know how to spend all that money once we finally get to age which we can withdrawl with no fees. But have little… Read more »

KSR
KSR
8 years ago
Reply to  Bella

Bella you have a very good situation and something to be very proud of. That said, my best advice— and not being Robert Brokamp but a fellow maxi-saver—is to only contribute to your 401k to the extent of the employer match. Get an on-line money market account and have liquid savings to cover 6-8 months of living expenses. After that, open and max out your Roth IRA (one for each of you). In the mean time–beg your employer and even form a mini army at work that can advocate for the Roth 401k option.

Nihongo Dame Desu
Nihongo Dame Desu
8 years ago
Reply to  Bella

If you think you might retire or have large expenses before you turn 59.5, then you’ll want to have some money available in non-retirement accounts so that you can access it, without penalty, before you hit 60. The article touches on this a bit at the end, but in your situation it is something to keep in mind. I don’t have a 401k so I’m not familiar with the withdraw rules, but just make sure you don’t paint yourself in to a corner where you have all this money but you can’t access it when you need it because it… Read more »

moola mind
moola mind
8 years ago

This is a great article. I’ve seen a lot of people in the same boat, just like savenmypennies. You make a great point that if you’re spread thin, you can’t always take advantage of better opportunities for you money. As for the tax question, and a roth. We just did interviews with 5 CPAs, and they said they have seen more of their clients retiring in higher tax brackets than they planned, and actually paying more than they would have had they paid it and then grew it tax free. It wasn’t everyone, but a lot of them. I thought… Read more »

Adam
Adam
8 years ago

Great Article! I just moved my money into Schwab for investing and I love the service!

BudgetAdvisor
BudgetAdvisor
8 years ago

This is a great topic that most people seem to miss. Having accounts scattered makes asset allocation and even just accounting for all of your money difficult. I consolidated my investment accounts all into Fidelity many years ago. I still prefer to use a local bank for local checking and savings accounts and use the same bank for my business accounts. I have another local bank that I use for my vacation/fun fund. Having it at a different bank helps keep this fund separate. My challenge is related to asset allocation. I have a small percentage in CDs. Chasing yields… Read more »

PedroNY
PedroNY
8 years ago

There is a strong case to be made that bonds and REITS should go into ROTH IRA, as bond income is regular ordinary income, but it is not taxed if in ROTH. If you put it into IRA, eventually you will be paying income tax on that. There are some great charts on boogleheads forums, you should check them out as well.

Megan E.
Megan E.
8 years ago

Not too much new information here, but relevant to me right now, regardless! One thing that wasn’t covered here – when the article says “Move money out of mediocre (or worse) accounts. This is especially true of money left in retirement plans from former employers, which often have limited investment choices at high costs.” What about the costs of doing this? In particular, I have some money at a bank with higher fees and it’s performing poorly and I want to move it to Vanguard. But since it’s a taxable account, I will have to pay to move it, plus… Read more »

chacha1
chacha1
8 years ago
Reply to  Megan E.

Does “performing poorly” mean you’re in loss position? Because if so, the only cost to selling off that account and putting the proceeds into a tax-advantaged account, at least as far as I know, is any transaction fees due to the brokerage.

I chose to sell off a non-tax-advantaged brokerage account that had earned basically nothing. My total cost on it was about $29.31, which was negligible in terms of the tax effect.

mary w
mary w
8 years ago
Reply to  Megan E.

If its in a retirement account you can do a custodian to custodian transfer without owing any tax. If its in a regular brokerage account I’m not sure if that works. Either way talk to Vanguard about how to do it w/o tax implications.

Mom of five
Mom of five
8 years ago

Happy Birthday!

We’re definitely guilty of the savings sprawl. Here’s a crazy question that probably reveals our investing ignorance – what if it turns out that Vanguard is a gigantic Madoff-esque house of cards? Isn’t it better that we’ve also got some money in Fidelity, some in Sovereign Bank, some in Ing, etc.?

Rosa
Rosa
8 years ago
Reply to  Mom of five

it depends how rich you are. SIPC insurance (securities & brokerage accounts) is $500,000. FDIC (savings & CDs) is $250,000. If you have more than that, split it up with different institutions.

mary w
mary w
8 years ago

I second the suggestion to consolidate accounts. When my father died he had CDs scattered around because he chased rates. He kept good records so we knew where all the money way, however, each bank has a slightly different process for getting the money out of his name. It was a major PITA.

Marwan
Marwan
8 years ago

I’ve got everything with Vanguard with the exception of my employers 401k. The target retirement accounts are great but one issue I realized with them is that they do not offer “admiral” shares of these type of funds no matter how many shares you own. Admiral shares are available for the component parts of these funds and can offer lower expenses. Not sure how much one should worry about this given Vanguard’s very low fees to begin with but I decided I’d rather just own the component parts and get the benefit of admiral shares. As for the 401k, fortunately… Read more »

Sue
Sue
8 years ago

Happy Birthday. It’s my birthday today, too!
I have traditional IRAs at TD Ameritrade & Scottrade and a 403B account still with a former employer. I have been thinking of consolidating them all in one place. Any preferences of the two brokerages I already use?

carmel garcia
carmel garcia
8 years ago

I am confuse, which is best to invest my lump sum, my 401k in the credit union bank or in the financial institution like Charles Schwab. Would you mine please answers this messages. I love your website. Get rich slowly. That is true. Sincerely, Carmel Garcia

Nihongo Dame Desu
Nihongo Dame Desu
8 years ago
Reply to  carmel garcia

Does your 401k have a company match? That means that if you invest $100, your company will invest another $100 for you. So it is almost free money. If there is a match, then yourr 401k is a much better deal.

Alan | Life's Too Good
Alan | Life's Too Good
8 years ago

Is this meant to be general investment advice – i.e. where is the best place to put my money or ‘traditional’ financial advisor type of investment advice? Surely these days people should consider putting their money in property rather than financial instruments of any kind. At least consider it. The financial markets are more volatile than ever which is fine if you work in that industry (though even a bigger challenge than usual for the experts at the moment). I wouldn’t be surprised if financial investments which were advised as safe start getting squeezed (e.g. charges attached etc) just due… Read more »

John
John
8 years ago

No, most people probably shouldn’t be considering putting their money in property instead of financial instruments.

Megan E.
Megan E.
8 years ago

A Roth is a tax advantaged retirement account in the United States – it’s like a TSP account in Canada. Basically, you put in after tax dollars and (ideally) you take out all the money tax free when you retire (or can use it for education or to buy a house).

If you think your tax bracket will rise, it is a good idea to do. If you think it will decrease, it is not as good an idea, although I would still put a little bit in, just to diversify.

chacha1
chacha1
8 years ago

Having witnessed several “housing bubbles” and the career damage that can result from not being able to move when a better job becomes available (because people are tied to a home mortgage) … no, owning property is not the best place to put money. It’s a good place to put money that you don’t need within a foreseeable span of time. But if there is any chance, any chance at all, that you would need to sell that property and move, then your “investment” is at the mercy of time and circumstance much more than a fat IRA could be.… Read more »

adriano
adriano
8 years ago

the idea of a mutual fund without a transaction fee doesn’t appeal to me. firstly there are costs associated with transactions and someone has to pay them at some point, so not having transaction fees just means having higher management fees. more importantly a transaction fee will discourage short term speculation. a mutual fund is supposed to function as a savings tool, there is no reason to follow the value too closely. if you don’t trust whoever manages the fund then you shouldn’t have your money in it in the first place. if the size of the fund fluctuates then… Read more »

David Sneen
David Sneen
8 years ago

I don’t have any Roth IRA. But, is a commitment to work hard on your blog so you move up two steps a good investment?

Nihongo Dame Desu
Nihongo Dame Desu
8 years ago

Is there any reason to consolidate other that ease of tracking? I have a zilllion accounts. Old 403b account, Roth IRA and then a second Roth (the first was set up when the limit was $4k and I put the additional allowable $1k into an account with USAA, where I do all of my banking). The husband has an old Roth (with not much money in it and no active contributions), a current Roth at $4k investment annually, and another Roth at $1k annually. We have an older taxable investment account that we no longer put anything into. Husband has… Read more »

Tim Thompson
Tim Thompson
8 years ago

See, that’s the thing about Roth IRAs that everyone says. “If you’ll be in a higher tax bracket when you retire, go with Roth.” Ok, great! How will I know what my tax bracket will be? Our tax rates will be affected by everything from how many Democratic vs. Republican presidents we have in the next 30 years to the deficit to the public debt to the God knows what else. I know that the advice can’t get much more specific than this, but I wish we didn’t have to rely on our crystal ball to decide if the Roth… Read more »

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