Why It’s Time to Pool Your Retirement Accounts
Today’s topic is a subject dear to me.
It was 15 years ago when I started in the financial services industry. During the late 1990s, 401(k)s and individual retirements accounts (IRAs) were gaining traction in the American worker’s psyche. For the most part, gone were the days of the actuary and the company’s pension plan.
Your retirement savings were now your responsibility and you needed to know the rules. And it was my job to translate IRS speak and let you know what you could, could not and probably should do.
Now, even more of you participate in these types of retirement accounts and many of you still have questions.
“One-Employer” Days Are Behind Us
The workplace environment has definitely morphed into something new. We all know that the job market has been crazy lately. But are you aware just how crazy it’s been over the last half century?
Changing jobs and careers is now the norm and not the exception, especially if you’re college-educated and born after the latter years of the Baby Boom – stemming from 1957 to 1964. According to the Bureau of Labor Statistics, men with a Bachelor’s Degree or higher held on average over 11 jobs between the ages of 18 and 46. Women on the same educational level held a little over 12 jobs during this same time.
David Wray, President of the Plan Sponsor Council of America, PSCA, has stated,
“Clearly what we have is people entering their fifties, who have three or four accounts, plus their current employer’s one…”
Leaving Money All Over the Place
No one is sure how many people are out there trying to synchronize a bunch of different 401(k)s and IRAs. From the data, we can tell that the number is sizeable.
The Bureau of Labor Statistics tells us in 2009 that nearly 17% of the 72.5 million participants in 401(k)-type retirement left their savings in their old employers’ plans.
Last year a study by Aon Hewitt showed that of all employees let go last year, the following happened:
- 40% of the employees received a cash distribution.
- 30% left their money in their former employer’s plan.
- The last 30% rolled over their money to another qualified plan.
Taking a cash withdrawal from your 401(k) coupled with being under the age of 59 and a half would make you subject to a mandatory 20% withholding on the distribution. This tax obligation could be greater depending upon your tax rate.
When working in the retirement industry, one of the first questions I would ask was, “How much retirement money do you have out there?” If your money is sitting out there in some account that’s not being guided correctly, it’s a waste of your money and you’re likely losing value. Plus, retirement is goal-oriented. The planning process becomes a lot harder when you don’t know what you have and where it’s going.
Make it easy on yourself and consolidate. One of your best options may be to roll that retirement plan into an IRA.
Rolling Funds into a New or Existing IRA
If you’ve seen a number of 401(k)s, you’ll find that most have a limited number of investment options. They may have few offerings and they would specifically be categorized as an equity, bond, or money market mutual fund.
IRAs generally have cheaper costs than 401(k)s. And maybe more importantly, IRAs usually give you the ability to dabble in more of the asset class and financial instrument options we discuss here at Investment U.
Here are a few tidbits to keep in mind if you do rollover your retirement assets in an IRA.
- You can make IRA contributions up to the April tax deadline of the following year. For example, you can make your 2012 IRA contribution up to April – whatever day the IRS marks as the deadline – 2013. The maximum contribution to your IRA this year is $5,000. For 2013, the IRS upped the max to $5,500.
- For those investors age 50 and older, the IRS gives you the opportunity to add an extra $1,000 to your contribution limit. It's called a catch-up provision and the limit remains unchanged from 2012. Those 50 and older can put away $6,000 in an IRA this year and another $6,500 in 2013.
… And if You Still Have a Workplace Plan in Place
Always remember that if you’re currently employed, and contributing to a new 401(k) plan, you may be able to roll old plans into your current one. But there is a chance you may not. A lot of employer sponsored retirement plans are customized and their rules depend upon the company and the underlying financial institution.
But many people have a current 401(k) and a rollover, so don’t neglect what you can do with your workplace retirement plan.
Now, let’s look at two ways you can maximize your current 401(k).
You need to max out your 401(k) plan contributions for 2012 and 2013. You can adjust your salary deferral so that you hit the max. The maximum contribution to 401(k)s for this year is $17,000. The maximum 401(k) contribution is going to go up to $17,500 next year.
Secondly, make sure you contribute enough out of your salary to get the company's matching contribution. This is very important and it seems that many of us are not taking advantage of this option. A study last year by Fidelity found that nearly 40% of 401(k) employer matching dollars were "left on the table." That's basically wasting free money. There’s no way that’s a prudent investment strategy.