Clearing Out Your Financial Planning Cobwebs

To keep your financial house in order, it’s probably a good idea to clear the cobwebs every once in a while. Look at it like a financial check-in. You might even spot potential issues before they become real problems. While it’s possible to automate much of your finances — from paying your bills to contributing to your retirement accounts — some things require more attention. Now’s as good a time as any to put the following items on your to-do list.

1. Consolidate Old 401(k)s

If you have a left-behind 401(k) with a previous employer, it probably isn’t doing you much good as is. You can no longer make contributions, and the plan provider could charge fees on top of that. Depending on your balance, they might cash out your account or require you to move it. A 401(k) rollover is a simple solution and can be done in a few different ways. It won’t count as a taxable distribution if you deposit the balance into another 401(k) or traditional IRA within 60 days.

  • Roll the balance into a new 401(k) with a different employer. This brings your retirement funds together and allows them to grow in one place.

  • Move the funds into a traditional IRA. Like a 401(k), traditional IRAs also grow on a tax-deferred basis. You won’t pay taxes until you take money out in retirement. You can open a new IRA, consolidate your old 401(k) balance, and continue making contributions.

  • Convert the old account into a Roth IRA. Roth IRA contributions are made with after-tax dollars. That means you’ll be taxed on the amount you rollover from an old 401(k). On the upside, you’ll enjoy tax-free distributions in retirement.

You can call your 401(k) plan administrator to coordinate a rollover. They might facilitate the transfer for you, or cut you a check and you can do it yourself. Just remember to get it done within 60 days. It might be tempting to withdraw the money from an old 401(k) and call it a day. If you do, that money will be taxed as ordinary income. It could even nudge you into a higher tax bracket for the year. A 10% early withdrawal penalty will also apply if you’re younger than 59 ½.

2. Update Your Beneficiaries

Planning for the unthinkable isn’t exactly fun, but it’s absolutely necessary. If it’s been a while since you last updated your beneficiaries, consider reviewing your designations. An ex-spouse, for example, may still be next in line to inherit a portion of your wealth. Check in with yourself and decide who you’d like the beneficiaries to be on the following accounts:

  • Your life insurance policy

  • 401(k)s and other retirement accounts

  • Brokerage accounts 

An ideal time to update your beneficiaries is after a significant life change, like getting married or divorced or having children. It can also be something you simply revisit every few years.

3. Revise Your Estate Plan

Tweaking your beneficiaries goes hand in hand with estate planning. While more than half of Americans see it as at least somewhat important, only a third actually have a will or living trust. Estate planning goes beyond just writing a will. It’s a collection of legal documents that outlines clear directions for after you’re gone. That includes your wealth, child custody and more.

  • Will: Provides instructions regarding your assets and the custody of minor children

  • Health care proxy: Lays out your end-of-life wishes and appoints someone to carry them out

  • Power of attorney: Gives a trusted family member or friend permission to manage your finances if you become incapacitated

  • Revocable trust: Allows your loved ones to avoid the probate process, which can be costly and drawn out

4. Get Life Insurance

Life insurance is at the heart of risk protection. It’s one of those things you pay for hoping you’ll never actually need it — but if you do, it’s your loved ones who’ll benefit from it. If your family is grieving, the last thing you want is to add financial troubles to their heartache. A life insurance plan provides a death benefit for whoever you appoint as beneficiary.   

You can purchase a policy through a traditional insurance provider or see if one’s available through your employer. A 30-year term policy, for example, will provide protection for three decades. If something happens to you during that time, your family will be taken care of.

5. Check in on Your Financial Goals

Accountability is the name of the game. Taking stock of your financial goals can clarify where you are and how much further you have to go. From there, you can make an action plan for getting there. Your goals may include:

It isn’t an all-or-nothing situation. Chances are you’re working toward multiple financial goals, and that’s okay. We help people prioritize what matters to them most, then make a realistic game plan based on their cash flow. Give us a shout if you need some pro tips while clearing out your financial planning cobwebs.

AJ Grossan