U.S. workers have left more than $1 trillion in 401(k)s with former employers. That might not be all bad, especially if those plans are doing well. However, sometimes they aren’t, and these tax-advantaged accounts are neglected by their owners. Before year-end 2022 it would be a good idea to take stock of these old 401(k) accounts and consider rolling them over into another account. Here are the steps to making sure these accounts aren’t left as “orphans” among your finances as you prepare for retirement. Consider working with a financial advisor to create or modify a retirement plan.
What Is a 401(k)?
A 401(k) is an employer-sponsored plan in which you divert portions of each paycheck into a retirement investing account. This is a defined contribution plan because account holders regularly contribute a set amount to their account. This is in contrast to defined benefit plans, like a pension, where it’s the payouts in retirement that are predetermined.
How much you subtract from your paycheck and contribute to your 401(k) is entirely up to you. Just know that for 2022, the IRS generally caps annual contributions at $20,500.
To help you grow you retirement savings, many employers offer 401(k) matching contributions. In other words, your employer will also contribute to your account up to a certain dollar amount or percentage of your annual salary. This basically amounts to free money, so you should make every effort to at least contribute up to that limit if your employer offers matching. These plans are only accessible through an employer.
How to Find Unclaimed 401(k) Benefits
In some cases investors haven’t just neglected their old 401(k) plans, they’ve actually lost track of them. In that case, here are two things you can do:
Contact your previous employer. If your employer is still in business, there’s a chance your 401(k) is still in the account that you had when you were with the company. Most companies try to reach out by sending mail regarding your account when you leave the company. If you moved when you changed jobs, you might have missed those notifications.
Use government resources. If your former employer does not have your old 401(k), you can search on the Department of Labor’s abandoned plan database. The department makes it easy to search online for and file a Form 5500. You’ll need to know your plan administrator, their EIN, the plan name or other essential information to use this tool.
Reasons to Roll Over an Old 401(k)
There are several reasons it might make sense to move money out of an old 401(k) plan. One is that the expenses of the plan administrator are excessive. Or perhaps the operating expense ratio of the fund itself is more than you want to pay.
Performance could also be a reason to move money. It could be that your old plan just isn’t delivering the results you were expecting and that you need to reach your financial goals. Alternatively, it could be that you see other tax-advantaged plans that are delivering far better results.
How to Roll Over an Old 401(k)
If you decide to move your money out of an old 401(k), here are seven steps that Morningstar recommends following:
Check your account value. If your account’s balance is over $5,000 you have numerous options. If your account’s value is less than $5,000 your options may be limited. “Whatever you do, make every attempt to avoid pulling the money out of the confines of a 401(k) or IRA; otherwise, you’ll pay taxes and a 10% penalty if you’re under age 55.”
To stay with a 401(k) structure or not. Among particularly attractive options, assuming you have more than $5,000, are no-fee IRAs with a strong mutual or exchange-traded fund company or discount broker. “You can put almost anything you like within an IRA, and you’ll usually be able to avoid any administrative fees if you shop around,” says Morningstar.
Evaluate the quality of your 401(k) options. Just because you are assessing your options doesn’t mean you have to move your money. Checking out alternatives may confirm your old 401(k) is still an attractive choice.
Find the right IRA provider. Take this step if you decide to switch into an IRA. “Look for a firm that offers a breadth of high-quality investment options, both stock and bond, with no additional layers of fees for IRA investors.” Besides ETFs and mutual funds, stock and bonds, you can buy other securities for your rollover IRA, including target-date funds, commodities, real estate and non-publicly traded assets in a self-directed IRA.
To Roth or not to Roth. Whether to roll over your old 401(k) assets into a Roth IRA or a traditional IRA will depend on your tax situation.
Beware Unnecessary Taxes. If you’re rolling the money into a traditional IRA you’ll need to request a direct rollover from your 401(k) plan to the new IRA provider. If you’re moving this money into your current employer’s 401(k), the process could take longer and entail a bit more paperwork, says Morningstar. In either case, your 401(k) provider should make the check payable to the IRA or 401(k) provider. If the check is made out to you, 20% of the balance will be withheld for income tax. You’ll then have 60 days to get that money deposited into an IRA or another 401(k). Miss that deadline and the distribution will count as a withdrawal and incur ordinary income tax and a 10% early withdrawal penalty if you’re not 55 or older.
Determine what to invest in. The decisions about which securities to buy will reflect your timeline, financial goals, risk profile and the level of engagement you would like. Your choices will include equities, bonds, exchange-traded and mutual funds, highly liquid assets and sometimes even alternative investments.
If you’ve got money in one or more old 401(k)s they may need your attention. Following the steps outlined above gives you an opportunity to maximize your returns and update your asset allocation.
Be sure to follow all the IRS rules, though, or you could be hit with a severe tax bill.
Tips on Tax-Advantaged Accounts
- A financial advisor can help you audit and, if needed, roll over an old 401(k). Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Our free 401(k) calculator will help you figure out what your 401(k) will be worth at retirement.
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