Greg is 43 years old. During his 20-year career, he’s worked for 4 different employers. In his 20’s and early 30’s, Greg didn’t pay attention to his finances – at that time he didn’t have a wife and 2 kids. But now, things are different. He remembers contributing to his previous employers’ 401(k) plans – but he can’t remember if he transferred his 401(k) money when he left his employers.
For some of us, this scenario sounds all too familiar. We become busy with our new employer and forget (or don’t want to be bothered with) moving our 401(k) money. It’s YOUR retirement money, take time to move it now. Even if your last employer was 10 years ago, don’t be embarrassed. It’s never too late to claim your 401(k) from your previous employer.
First, contact the Human Resources (HR) department from your previous employer. If your previous employer was acquired, contact the HR department for the new parent company. If your previous employer is no longer in existence, check the National Registry of Unclaimed Benefits.
Once you confirm you have money in a previous employer’s 401(k) plan, here are your three options:
1- Transfer money directly into your current employer’s 401(k) plan.*
2- Transfer money directly into a traditional IRA.
3- Transfer money directly into a Roth IRA.
Notice the term “transfer money directly” is used in all three options. Remember, your 401(k) is pre-tax money for you to use when you retire. If you receive a check made payable to you AND you are younger than 59 ½ years old, a 10% penalty will be deducted from your check. Also, you are subject to ordinary income tax on this distribution (even if you are over 59 1/2 years old). Most plans withhold 20% for income taxes. To avoid the tax penalty and income tax withholding, request a transfer and the check will be sent directly to the option of your choice.
When deciding which option to take, consider which tax bracket you are in now AND which tax bracket you may be in when you retire. Also, take into consideration if you are moving money from a traditional 401(k) to a Roth IRA or even a Roth 401(k). Discuss your situation with a financial professional with recognized credentials to better understand your options.
*Earlier this year, the IRS issued guidance to simplify the transfer of assets between all types of qualified retirement plans, which includes 401(k) plans. Historically, the plan administrator for the receiving plan had to verify the legitimacy of the incoming plan – a burdensome task involving lots of paperwork and communication. In the past, plan sponsors had to take responsibility for confirming incoming rollover monies came from a plan that was compliant and met fiduciary standards. If problems were discovered after the fact, sponsors risked the possibility of having their own plan disqualified. IRS Revenue Ruling 2014-09, published in April, eases that risk. Now, plan administrator for the receiving plan need only to access the most recently filed Form 5500 (annual report) for the incoming plan. This Form is stored online on the EFAST2 database maintained by the Department of Labor. (a)
(a) Information provided by the Financial Planning Association® via Wealth Management Systems Inc. Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
Employee Benefit Adviser, “The risk of inactive retirement plan participants,” May 21, 2014.
Pensions & Investments, “Treasury and IRS offer rollover relief,” April 3, 2014.
ABOUT THE AUTHOR:
Niv Persaud, CFP®, CDFA™, CRPC®, is the Founder of Transition Planning & Guidance, LLC. Her firm bridges the gap between financial planning and coaching. As a Transition Consultant, she offers sage advice in all aspects of life – financial, personal and professional. Niv does not manage money and does not sell financial products. She charges an hourly fee on a retained basis. Her services include spending plan development, divorce financial review, life strategy and professional progression. Niv actively gives back to her community through her volunteer efforts. She believes in living life to the fullest by cherishing friendships, enjoying the beauty of nature and laughing often — even at herself. Her favorite quote is by Erma Bombeck, “When I stand before God at the end of my life, I would hope that I would not have a single bit of talent left and could say ‘I used everything you gave me’.”