How to Find a 401(k) From an Old Job— and Boost It!
In this episode of Money Rehab, Nicole Lapin and guest Morgan Lavoie discuss strategies for managing old 401(k) accounts from previous employers. They cover the step-by-step process of locating forgotten retirement accounts, including how to contact former employers, check national registries, and review old documentation. The discussion also addresses what happens to accounts with balances under $5,000.
The conversation explores options for consolidating retirement savings through rollovers into traditional or Roth IRAs. Lapin explains key considerations for these transfers, including tax implications, timing restrictions, and potential penalties. She outlines common pitfalls to avoid during the rollover process and emphasizes the importance of direct transfers to protect retirement savings from unnecessary taxes and fees.
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Tracking Old 401(k) Accounts From Previous Jobs
When changing jobs, keeping track of your 401(k) retirement savings is crucial. The first step is to contact your former employer's HR or payroll department to confirm the existence of a 401(k) and get the plan provider's details. If you can't reach your previous employer, you can check the national registry of unclaimed retirement benefits or the Department of Labor's list of abandoned plans. You can also review old pay stubs or emails for the plan provider's name. Keep in mind that accounts with balances under $5,000 may have been automatically cashed out or moved to an IRA.
Rolling 401(k)s Into IRAs or Roth IRAs
Morgan Lavoie shares how she took advantage of Public's current 1% match incentive by rolling her 401(k) into a traditional IRA. Nicole Lapin explains that direct rollovers are crucial to avoid the 20% tax withholding and potential 10% early withdrawal penalty. When converting to a Roth IRA, Lapin notes that you'll owe immediate income tax on the transferred amount. Before making this decision, consider your current tax bracket, future tax expectations, and ability to pay the conversion taxes from non-retirement funds.
Avoiding Common Mistakes During the 401(k) Rollover Process
Lapin warns against handling rollover funds personally, as this triggers a 60-day deadline for redepositing the money to avoid taxes and penalties. While IRA-to-IRA rollovers are limited to one per year, 401(k) rollovers are exempt from this restriction. For the best outcome, Lapin recommends consulting a tax professional to understand the tax implications and develop appropriate strategies for your situation.
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Actionables
- Create a personal finance transition checklist when changing jobs to ensure you don't overlook any retirement accounts, including steps for contacting HR, checking national registries, and reviewing old documents for 401(k) information.
- Having a checklist ensures you systematically address each potential source of information regarding your 401(k). For example, the checklist could include items like "Email old HR for 401(k) details," "Search the national registry of unclaimed benefits," and "Review last year's pay stubs for plan provider info."
- Set calendar reminders for key rollover deadlines to avoid taxes and penalties if you're handling retirement funds during a job transition.
- Timely reminders can help you avoid missing the 60-day deadline for redepositing rollover funds. For instance, if you receive a rollover check, immediately set a reminder for 45 days later to check on the redeposit status, giving you a 15-day buffer before the deadline.
- Use a tax bracket forecast tool to help decide whether converting to a Roth IRA is financially beneficial for you, considering your current and future tax situation.
- Online tools can project your future tax bracket based on current trends and personal financial information, aiding in the decision-making process for a Roth conversion. For example, input your current income, expected income growth, and available non-retirement funds to see if a Roth IRA conversion aligns with your long-term tax strategy.
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Tracking Old 401(k) Accounts From Previous Jobs
It's important for individuals to keep track of their 401(k) retirement savings, especially when transitioning from one job to another. Here’s how you can go about locating and managing old 401(k) accounts from previous employers.
Contacting Former Employers About 401(k) Plans
If you believe you have a 401(k) account from a previous job, the first step is to contact that employer.
Contact HR or Payroll to Check For a 401(k) and Get the Plan Provider's Details
Reach out to the former employer’s HR or payroll department. They should be able to confirm whether you have a 401(k) and provide you with the details of the plan provider.
Check National Registry or Department of Labor For Unclaimed or Abandoned Retirement Plans
In cases where the old employer went out of business or you're unable to contact them, you have other resources. Check the national registry of unclaimed retirement benefits or consult the Department of Labor's list of abandoned or in the process of being terminated plans.
Utilizing Resources to Locate Lost 401(k) Accounts
There are several tools at your disposal to track down lost 401(k) accounts.
Check Pay Stubs or Emails For 401(k) Provider Name
Start with your own records. Check old pay stubs or emails for the name of the plan provider, which can give you a lead on where to look next.
Unclaimed Retirement Benefits Registry and Abandoned Plans List
Use the unclaimed retirement benefits registry and re ...
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Tracking Old 401(k) Accounts From Previous Jobs
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Counterarguments
- While contacting HR or payroll departments is a good first step, it may not always be effective, especially if the company has undergone significant changes or poor record-keeping.
- The national registry and Department of Labor lists can be helpful, but they may not be comprehensive, and some accounts could slip through the cracks if not properly reported or updated.
- Relying on old pay stubs or emails assumes that individuals have maintained good personal records, which may not be the case for everyone.
- The process of tracking down old 401(k) accounts can be time-consuming and complex, which might discourage some individuals from pursuing their lost retirement funds.
- The automatic cash-out or rollover of small 401(k) balances can sometimes be done without the best interest of ...
Actionables
- Create a personal 401(k) tracking spreadsheet to monitor your accounts across different jobs. Start by listing all your past employers, the dates you worked there, and any 401(k) contributions you remember making. Update this spreadsheet whenever you change jobs, making sure to note the new plan provider and any changes to your contributions. This habit will give you a clear overview of your retirement savings and make it easier to spot any discrepancies or forgotten accounts.
- Set calendar reminders for an annual 401(k) review to ensure your retirement savings are on track. Choose a specific date each year, such as your birthday or tax day, to sit down and go through your tracking spreadsheet. During this review, check that your contact information is up to date with each plan provider, reassess your investment allocations, and consider consolidating accounts if it makes financial sense.
- Designate a trusted family me ...
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Rolling 401(k)s Into IRAs or Roth IRAs
Individuals leaving an employer or looking to simplify their retirement portfolios often consider rolling their 401(k)s into IRAs or Roth IRAs for better control and potentially superior tax benefits.
Roll Over To IRA For Tax-deferred Growth
Open IRA at Public With 1% Match on 401(k) Rollovers
Morgan Lavoie took advantage of the current incentive offered by Public by rolling her 401(k) into a traditional IRA. Public is providing a 1% match on such rollovers, offering an immediate boost to retirement savings.
Direct 401(k) Rollover to Avoid Taxes/Penalties
Lapin highlights the critical process of a direct rollover to transfer funds. By having the money move directly to the IRA, individuals avoid the funds being treated as a distribution. A direct rollover circumvents the costly scenario of a 20% withholding for taxes and a potential 10% early withdrawal penalty for those under the age of 59 and a half.
Grow Rolled-Over IRA Funds
The rolled-over funds in the traditional IRA will continue to grow on a tax-deferred basis, meaning taxes are not paid on the growth until withdrawals begin, typically in retirement.
Roth IRA Conversion For Tax-free Retirement Growth
401(k) to Roth IRA Conversion Triggers Income Tax
Nicole Lapin explains that converting from a 401(k) to a Roth IRA means immediately owing income tax on the amount transferred. This upfront tax obligation can be substantial, as it is levied on the entire rolled-over balance.
Consider if You Can Afford the Tax Hit, Are in a Low Tax Bracket now, and Expect a Higher Bracket Later
Before proceeding with the Roth conver ...
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Rolling 401(k)s Into IRAs or Roth IRAs
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Counterarguments
- While Public's 1% match on 401(k) rollovers is an incentive, it may not outweigh the benefits of employer-matched contributions in an active 401(k) plan.
- Direct rollovers are indeed a tax-efficient way to move funds, but the process can be complex, and mistakes can lead to unintended tax consequences.
- Tax-deferred growth in a traditional IRA is beneficial, but it assumes that tax rates will not be higher in the future when withdrawals are made.
- The immediate tax hit from converting to a Roth IRA can be substantial and may not be the best strategy for everyone, especially if one's future income does not place them in a higher tax bracket.
- Paying taxes with outside funds to maximize Roth IRA growth is ideal, but not everyone may have sufficient funds available to do so without compromising their financial stability.
- The ass ...
Actionables
- You can use a financial calculator online to compare the potential future balances of a traditional IRA versus a Roth IRA based on your current age, expected retirement age, current tax bracket, and expected future tax bracket. By inputting different scenarios, you'll get a clearer picture of how the choice between a traditional IRA and a Roth IRA could impact your retirement savings, helping you make a more informed decision.
- Create a "Roth conversion ladder" by converting a portion of your 401(k) to a Roth IRA each year, staying within a tax bracket that's favorable to you. This strategy allows you to spread out the tax liability over several years, potentially reducing the overall tax hit and making it easier to manage the conversion taxes from your current ...
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Avoiding Common Mistakes During the 401(k) Rollover Process
When managing a 401(k) rollover, it's important to steer clear of certain pitfalls that could lead to financial losses due to taxes and penalties.
Avoid Taking the Money Yourself; Complete a Rollover Within 60 Days to Avoid Taxes and Penalties
Nicole Lapin, a financial expert, advises against handling the rollover funds personally. If you take the money yourself, you trigger a 60-day limit within which the funds must be redeposited into the new retirement account. Failure to redeposit the funds within this 60-day window can result in significant taxes and penalties.
IRA Rollovers Limited To One Per Year; 401(k) Rollovers Exempt
Lapin also points out that IRA to IRA rollovers are limited to one every 12 months. However, this particular rule does not apply to direct rollovers from a 401(k) plan. Therefore, it's beneficial to opt for direct rollovers from a 401(k) since they are exempt from the once-per-year limit, unlike IRA rollovers.
Consult a Tax Expert For A ...
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Avoiding Common Mistakes During the 401(k) Rollover Process
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Counterarguments
- While avoiding taking possession of the funds can prevent triggering the 60-day deadline, there may be situations where a temporary withdrawal is part of a larger financial strategy, such as a 60-day rollover loan.
- The 60-day rule is strict, but the IRS may grant a waiver for missing the deadline under certain hardship circumstances, which is not mentioned in the text.
- The once-per-year limit on IRA rollovers might be seen as a limitation, but it also serves to discourage excessive trading and frequent changes in retirement strategies, which could be risky for some investors.
- Direct rollovers are generally preferable, but there might be cases where an indirect rollover is chosen for specific financial planning reasons, such as when consolidating multiple retirement accounts.
- Consulting a CPA or tax professional is sound advice, but for straightforward rollovers, some individu ...
Actionables
- Set calendar reminders for key rollover deadlines to ensure you don't miss critical dates. By marking your calendar with the 60-day deadline for completing a rollover, you create a visual and timely reminder that can help prevent accidental tax penalties. For example, use a digital calendar to set multiple alerts at the 30-day, 45-day, and 60-day marks after initiating a rollover to keep the deadline top of mind.
- Create a checklist of rollover steps and required documentation to streamline the process. Having a clear list of actions and necessary paperwork can simplify the rollover procedure and reduce the risk of errors. For instance, your checklist might include confirming the type of rollover (direct or indirect), gathering account numbers, and preparing a statement of intent for the receiving institution.
- Use a financial tracking app that includes a rollover feature to moni ...
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