Tag: IRA

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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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Facts and Feelings: Roth vs. Traditional IRAs

Photo: Towfiqu barbhuiya | Unsplash

The choice between a Roth and a traditional retirement account is one of the most common dilemmas in financial planning. As you probably know, both types of accounts grow tax-deferred. The difference is that contributions to traditional IRAs or 401(k)s may reduce your income tax due today. For Roth accounts there’s no upfront tax benefit, but then withdrawals in retirement are generally tax-exempt.

The typical “correct” answer is that the decision between a traditional and a Roth IRA comes down to the relationship between your tax rate now and your tax rate in retirement. This seems counterintuitive, as it feels like paying taxes on the large eventual balance you’ll have in your retirement account would be much worse than paying a little bit of tax now on today’s smaller contributions. The math does work, however, because the assumption is that you’ll have less to invest in your Roth because you have to pay taxes before you can invest.

Here’s a hypothetical example: Imagine a world where everyone pays a flat 20 percent income tax rate, now and forever, and your investments today will exactly double between now and retirement.

If you have $5,000 of income today that you want to invest in a traditional IRA, you’ll invest all $5,000 today, and it will double. If you pull that money out at retirement, you’ll start with $10,000, but after 20 percent in taxes you’ll end up with a net of $8,000 available to you.

If you have $5,000 of income today that you want to invest in a Roth account, you’ll get no tax benefit today. That means you only have $4,000 to start with after paying the 20 percent tax this year. If you withdraw these funds upon retirement, your money will have doubled and you’ll have $8,000 tax-exempt, which is exactly the same outcome as the traditional IRA example above.

You can see that if you think your tax bracket will end up higher in retirement, you’d lean toward a Roth. If you’re expecting a lower tax rate in retirement, you’d likely prefer a traditional contribution.

The math above is accurate, but for most people that’s not how it works. Very few people think in terms of allocating a certain amount of income to investment and netting out the taxes as necessary (as shown above). A more common plan would be to simply pick a dollar amount, then choose between a traditional IRA or a Roth. All else equal, putting $5,000 (or any fixed amount) in a Roth is likely going to result in more money for you in retirement than putting the same amount into a traditional IRA. That’s because these two hypothetical accounts funded identically will end up with the exact same balance at retirement, but tax would be due on the traditional IRA (while the Roth money would be available to you tax-exempt).

If you made a traditional contribution with the $5,000, you wouldn’t be thinking that you should invest the extra tax savings from funding your traditional IRA — you’d probably splurge on something with your slightly larger tax return next year. If you funded the Roth with $5,000, you’d likely eat out a little less over the year (or otherwise tighten your belt) to make up the difference (probably without noticing), functionally giving up a little consumption today to avoid taxes in the future.

Ultimately, the decision to fund a Roth is a little bit like a choice to prepay taxes. A Roth might be the “wrong” choice if you end up with very low taxable income in retirement, but on the other hand, I don’t know anyone who has ever had big tax problems in retirement from overfunding their Roth! A Roth might not be the optimal financial choice, but, depending on your situation, there can be intangibles (such as peace of mind) that can eclipse the hard numbers on paper.

You and your advisor are fortunate to have taxable, traditional and Roth options available. Together you can combine the facts with your personality to make the decision that allows you to feel confident — and stay invested — on the path toward a secure financial future.

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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Inherited an IRA?

Photo: Tima Miroshnichenko | Pexels

Inheriting an individual retirement account (IRA) can be a significant financial opportunity, but it can also present several financial considerations and potential tax implications. If you’ve recently inherited an IRA, it’s important to understand your options and make informed decisions in line with your overall financial plan and future goals. Take the following steps as soon as possible after inheriting an IRA.

1. Consult with your wealth manager. Inheriting an IRA can have significant financial and tax implications, which is why it’s important to seek professional guidance. Your wealth manager can help you understand how your inherited IRA may impact your financial plan and long-term objectives.

2. Consider your tax obligations. Inheriting an IRA can have significant tax implications. You may be subject to income taxes on any distributions you receive, and the tax treatment of the account can vary depending on the type of IRA, the age of the original owner, and your relationship with the owner. It’s important to work with a qualified tax advisor to understand your potential tax liabilities and develop a tax-efficient strategy for managing your inherited IRA.

3. Understand your distribution options. As the beneficiary of an IRA, your distribution options typically depend on the type of IRA you inherited, your relationship with the account holder, whether the account holder had begun taking required minimum distributions (RMDs) from the account, and when the account holder died. Typically, a beneficiary’s distribution options include the following.

• Lump-sum distribution — If you choose a lump-sum distribution of the entire account balance, you may face significant tax liabilities, as any assets withdrawn from a traditional IRA are subject to ordinary income tax rates during the year in which they are distributed.

• Spousal rollover — If you inherited an IRA from your spouse, you likely have the option to roll over the assets into your own IRA. This move allows you to treat the inherited IRA as your own and defer distributions until you reach age 73 (as of 2023).

• Stretch IRA — If you’re a non-spousal beneficiary and the original account holder passed away before December 31, 2019, you may have the option to “stretch” withdrawals from the account over your life expectancy. This move can allow you to take smaller RMDs over a longer period of time, which can help maximize the tax-deferred growth of assets within the account.

• Five-year rule — If the original account holder passed away before beginning RMDs or if there is no beneficiary named on the account, you may be subject to the five-year rule, which requires you withdraw the entire IRA balance by the end of the fifth year following the account holder’s death.

• Ten-year rule (SECURE Act) — If the IRA account owner died on or after January 1, 2020, the non-spouse beneficiary must withdraw the entire account within 10 years. Currently it’s unclear whether RMDs are required each year under proposed regulations. Your wealth manager will be able to help you determine if and when you need to take withdrawals from your inherited IRA.

4. Update beneficiary designations. It’s important to update the beneficiary designations on your inherited IRA to reflect your own beneficiaries. This helps ensure any remaining IRA assets will be distributed to your designated beneficiaries upon your passing. Regularly review these beneficiary designations to help ensure they continue to align with your overall financial goals and legacy wishes.

5. Review and update your estate plan. Inheriting an IRA may trigger a need to review your own estate plan. If you have your own IRA, you may become aware of changes you wish to make to help ensure your retirement assets are distributed according to your wishes. If you don’t already have an estate plan in place, inheriting an IRA may be a good reminder of the importance of establishing one, as the inheritance process often highlights the need to ensure your assets are distributed according to your wishes while minimizing your heirs’ tax liabilities.

Gene Gard, CFA, CFP, CFT-I, is a Wealth Manager with Creative Planning, formerly Telarray. 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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Don’t Take This Advice

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We talk a lot about best-practice financial ideas in this space, but here are four sayings you might hear that probably aren’t going to contribute to your long-term financial success.

Wait for a dip.

For many investors, their biggest fear is buying into the market and seeing the value drop a few percent in the next days and weeks. This is true even for investments like IRAs where the account most likely won’t be touched for decades. A lot of money has been lost over the years due to the opportunity cost of not buying into the market as early as possible and compounding over time — there’s no reason to wait. Retirees today seeing the S&P 500 at 4600 aren’t concerned if they bought in in the 1980s when it was at 350 vs. 400. They’re just glad they bought in.

Cash is king.

This is one of those old-fashioned aphorisms that has some truth to it but can be devastating to long-term financial performance. Cash can be comforting in the face of extreme market dislocations. Also, cash can be important if you’re extremely leveraged up or have unreliable or inconsistent employment income. Even so, cash is almost always a terrible “investment,” especially now, with low interest rates and relatively high inflation. Cash is a place to keep money that is likely to be needed soon, not to plan for the future. Absent a deflationary spiral, it’s hard to imagine an attractive (or even adequate) return on cash in the coming years.

Nobody ever lost money taking profits.

Closely related to “cash is king,” this sentiment has lost a lot of money in opportunity costs over the years. Let’s say you or your advisor carefully consider an investment choice and buy it. If it goes up 5 percent the next day, you might be inclined to sell it to lock in your gains. But then what will you do? Keep the proceeds in cash? Buy your second-best investment idea in that asset class? When stocks or funds consistently reach 52-week highs (or all-time highs!) it can be unsettling. But as long as GDP is rising, productivity growth remains positive, and inflation continues to tick up, the nominal value of a country’s equity market generally should consistently rise as time goes on. In such an environment, markets “should” be setting all-time highs relatively frequently.

Invest in what you know.

Investor Peter Lynch, legendary manager of Fidelity’s Magellan Fund between 1977 and 1990, popularized a style of investing focused on buying stocks associated with products you know and love. This certainly worked for Peter during the time he was active, but probably isn’t the best way to construct a diversified portfolio.

Closely related to the Lynch style of investing is the well-documented matter of home bias: Investors tend to prefer positions in their home countries or even smaller geographic regions. Academic research has demonstrated that the only “free lunch” in investing is diversification, meaning that diversification can reduce risk without reducing expected returns. Some professionals have been wildly successful with concentrated positions, but diversification is a good friend of typical investors. Your friends and neighbors who hit home runs with a single stock in their portfolio are probably more lucky than good.

Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your question at ggard@telarrayadvisors.com or sign up for the next free online seminar on the Events tab at telarrayadvisors.com.