Tag: 401(k)

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Missing Retirement Funds? 

Photo: Andres Siimon | Unsplash

Losing track of retirement funds is a common and concerning trend that has worsened in recent years. As of May 2023, there were approximately 29.2 million forgotten 401(k) accounts in the United States that held approximately $1.65 trillion in assets. And, due to recent increases in job switching, the number of forgotten 401(k)s has grown by more than 20 percent since May 2021. 

Missing out on these retirement funds can put your retirement at risk, as you may end up losing significant assets. Fortunately, there are ways to locate and reclaim lost retirement accounts. The following tips can help. 

1. Check with past employers. 

If you’ve changed jobs throughout your career, it’s important to follow up with past employers to make sure you didn’t leave any money behind. Retirement plan administrators have several options for how to handle abandoned funds in an employer-sponsored account, based on the amount left in it. 

• $1,000 or less — The employer can issue a check and mail it to your last known address. If you’ve moved since leaving a job, you may need to request a new check.

• Between $1,000 and $5,000 — Employers can move funds to an IRA without your consent. You’ll need to ask your past employer how to access the account. 

• More than $5,000 — There’s a good chance your funds are still in the employer’s plan. It may be wise to roll over the account balance to an IRA that you control. 

2. Search unclaimed property databases. 

Sometimes people lose track of their retirement savings when they move and forget to notify past employers of their new address. When an employer or financial institution is unable to reach an account-holder, it may turn over the account to the state’s unclaimed property office. 

Fortunately, you can search for your name on the National Association of Unclaimed Property Administrators (NAUPA) website or your state-specific unclaimed property office to find any unclaimed retirement funds that may be waiting for you. 

2. Check the Department of Labor (DOL) abandoned plan database.

If your past employer’s plan was terminated, the DOL’s Employee Benefits Security Administration consolidates information about unclaimed retirement benefits and makes it easy to track down missing funds. 

3. Contact the Pension Benefit Guaranty Corporation (PBGC).

The PBGC can be a great resource if you lost track of a defined benefit pension plan at a previous employer. This organization is a government agency that insures the value of pension benefits and helps individuals locate lost pension plans. Visit pbgc.gov for more information. 

4. Track down forgotten IRAs. 

If you think you may have abandoned an IRA along the way, take inventory of past bank and investment account statements for any evidence of the account. You can also reach out directly to any financial institutions you’ve worked with in the past to inquire about any inactive or dormant IRAs associated with your name. 

If you think you left behind retirement assets at some point, it may be worth the effort of tracking them down. Even if you haven’t contributed to the accounts in many years, the power of compounding has the potential to significantly grow your retirement assets over time. 

Gene Gard, CFA, CFP, CFT-I, is a Partner and Private Wealth Manager with Creative Planning. Creative Planning is one of the nation’s largest Registered Investment Advisory firms providing comprehensive wealth management services to ensure all elements of a client’s financial life are working together, including investments, taxes, estate planning, and risk management. For more information or to request a free, no-obligation consultation, visit CreativePlanning.com.

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Funding Your 401(k)

Photo: Kenny Eliason | Unsplash

If you’re making regular contributions to an employer-sponsored retirement plan, such as a 401(k) or 403(b), congratulations! You’re taking steps toward a more secure financial future. However, even those who participate in a 401(k) plan may worry they’re not contributing enough to achieve their retirement goals. 

Unfortunately, as with so many financial planning challenges, there’s no single guideline to ensure you’re putting enough aside. Even if you have an idea of the dollar amount you’ll need to comfortably retire, the amount you need to save varies based on a wide range of factors, including when you start investing, your portfolio allocation, market events, lifestyle goals, spending habits, inflation, etc. 

A general rule of thumb is to invest 15 percent of your income in a retirement account, but your exact savings requirements may differ widely from that number. Rather than focusing on a specific percentage, consider implementing the following tips to help maximize your employer-sponsored retirement plan benefits. 

1. Start contributing early. 

Thanks to the power of compound interest, it’s typically more advantageous to start contributing to a 401(k) as early as possible, even if you’re only able to commit to a small amount. 

2. Maximize your employer match. 

If someone offered to give you $3,000 each year with no strings attached, would you take it? Of course you would! Yet many people pass up retirement savings opportunities by not contributing enough to their 401(k) to receive the full value of their employer’s matching contribution. That’s essentially saying no to “free” money. 

  3. Increase your contributions by 1 to 2 percent each year. 

Once you’re contributing enough to receive your full employer match, consider increasing your contributions each year or whenever you receive a raise. Even a 1 to 2 percent annual increase can have a big impact on your savings over time, and you’re unlikely to even notice the impact on your take-home pay. 

4. Diversify your contribution types. 

Many employer-sponsored retirement plans offer the option of contributing to a traditional (pre-tax) 401(k) or a Roth (after-tax) 401(k). 

• Traditional 401(k) contributions provide the benefit of lowering your taxable income during the year in which they’re made. However, these assets and their earnings are taxed as ordinary income when you withdraw them in retirement. 

Once you are retired and reach a certain age, the IRS requires you begin taking required minimum distributions (RMDs) from your pre-tax retirement accounts. These withdrawals are subject to ordinary income tax. 

• Roth 401(k) contributions don’t provide an immediate tax benefit, but assets can be withdrawn without federal income tax as long as you’ve reached age 59.5 and held the account for at least five years. 

In addition, Roth 401(k) contributions aren’t subject to RMDs, which means your assets can continue growing within the account throughout retirement. 

Contributing a portion of your retirement savings to both types of accounts offers a combination of tax benefits, including: 

• An opportunity to lower your current taxable income when you’re in a high tax bracket by making pre-tax contributions

• Flexibility and tax-planning opportunities in retirement that allow you to draw from accounts with different tax treatments, based on your changing needs, market conditions, and tax exposure. 

Gene Gard, CFA, CFP, CFT-I, is a Partner and Private Wealth Manager with Creative Planning. Creative Planning is one of the nation’s largest Registered Investment Advisory firms providing comprehensive wealth management services to ensure all elements of a client’s financial life are working together. For more information or to request a free, no-obligation consultation, visit CreativePlanning.com.

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Is a 401(k) Loan Right for You?

Photo: Allef Vinicius | Unsplash

More retirement plan participants are taking loans from their retirement accounts, and they’re borrowing larger sums of money than in the past. According to data provided by Empower, a retirement plan administrator to 5.3 million accounts, 2.6 percent of participants (approximately 138,000 people) took a loan from their employer-sponsored plan during the third quarter of 2023. This is up from 2.3 percent in the third quarter of 2022 and 1.7 percent in 2020.

Fidelity, the nation’s largest retirement plan administrator, saw a similar increase, with 2.8 percent (641,000 people) requesting loans in the third quarter of 2023, up from 2.4 percent in that quarter of 2022.

The average loan has also increased in recent years. In a survey conducted by Plan Sponsor Council of America, the average 401(k) loan in 2022 was $15,000, up from $10,000 to $11,000 between 2018 and 2021. As of June 2023, the average outstanding loan balance is $8,550.

The popularity of 401(k) loans may be partly due to the fact that 70 percent of retirement plan participants report they don’t have enough in emergency savings to cover six months of expenses. So, it may be that participants are using these loans to pay for unexpected costs.

In the event of a financial crunch, many consider borrowing from their 401(k) because it could be faster and cheaper than other types of credit. However, despite their popularity, 401(k) loans can be highly detrimental to your long-term financial security. Following are five reasons to avoid borrowing from your employer-sponsored retirement account if possible.

1. Long-term savings impact

Perhaps the biggest downside to taking a loan from your 401(k) is that you’ll have less saved for retirement. Taking money from your retirement savings can significantly impact your savings potential over time.

2. Opportunity cost

One of the most significant advantages of contributing to a retirement account is the opportunity for tax-deferred growth and compounding interest. You miss out on this growth opportunity when you remove assets from the account. Even a small loan can significantly impact your long-term savings when accounting for this missed growth opportunity.

3. Double taxation

Contributions to employer-sponsored retirement plans are typically made with pre-tax dollars. You’re then taxed on your assets when you withdraw them in retirement. However, 401(k) loan repayments are made with after-tax money, meaning you need to earn more than you borrowed to repay your loan. In addition, your repayment amount will still be treated as a pre-tax source of income when you withdraw funds in retirement. That means you are paying taxes twice on any loan amount you repay to the plan.

For example, suppose you fall into the 24 percent tax bracket and take a loan from your pre-tax retirement plan. Every dollar you earn to repay your loan is taxed at 24 percent, meaning each dollar is worth only $0.76 after taxes. In order to make your retirement account whole again, you’ll end up paying 24 percent more than what you borrowed (not including interest).

In addition, you don’t get credit for having paid taxes on the loan repayment amount. When you withdraw the funds in retirement, they’re taxed again as ordinary income. If you remain in the 24 percent tax bracket, each dollar you withdraw from the loan repayment is again worth only $0.76. That’s a hefty tax consequence!

4. Missed contributions

Some retirement plans prohibit participants from making regular deferrals while they have an outstanding loan balance. Not only does this restrict the amount you can set aside in retirement savings, but it may also make you ineligible for employer matching contributions. That’s a double hit to your long-term savings.

5. Repayment requirements

If you leave your job for any reason, you’ll have 60 days or until the date you file your next tax return to pay off your outstanding loan balance. If you fail to do so, your outstanding loan balance becomes a taxable distribution subject to ordinary income taxes as well as a potential 10 percent early withdrawal penalty if you haven’t yet reached age 59½. This is another reason to avoid 401(k) loans because if something unexpected occurs you could face these significant taxes and penalties.

Gene Gard, CFA, CFP, CFT-I, is a Partner and Private Wealth Manager with Creative Planning. Creative Planning is one of the nation’s largest Registered Investment Advisory firms providing comprehensive wealth management services to ensure all elements of a client’s financial life are working together, including investments, taxes, estate planning, and risk management. For more information or to request a free, no-obligation consultation, visit CreativePlanning.com.