Your 401(k): Don’t Forget About it After You’ve Been Gone

Our generation is constantly on the move- personally and professionally. We tend to leap between corporate ladders rather than scale just one. While this movement can be good for your career, you may be leaving something behind at your old job- a 401(k). Don't forget about it as you're moving on.

A 401(k), as an employer-sponsored retirement plan, is always tied to a specific company. When you leave that company you lose the ability to add to your retirement account and some companies insist that your roll your account balance out of their plan within a certain time frame.  So what do you do with your 401(k)?

Start by determining how much of your account balance actually belongs to you. There are only two ways that money gets into to a 401(k)—your contributions and the company’s contributions.  Your contributions, added through withholding (deferral) of your pay, always belong to you. The funds that your company contributes, however, may have a “vesting schedule,” which means the funds do not fully belong to you until you work at the company for a set amount of time. The most restrictive vesting schedule is either a three-year cliff, where none of the company contributions are available until you have worked there for three years, or a five-year grading schedule, where you vest 20% a year and become fully vested after five years of employment. You can find your vested balance noted on your quarterly statement. If you are debating whether to leave your job you should consider your 401(k) vesting schedule, if you are close to vesting it may be advantageous to stay for another month or two.

Once you leave your job, there are four options for your 401(k)—roll it to an IRA, roll it into a 401(k) at your new company, withdraw the funds, or leave it in the old 401(k) plan.

For most people, the best option is to roll your 401(k) into an Individual Retirement Account (IRA). Rolling your 401(k) to an IRA retains its tax-advantaged status and increases your investment options. Many IRA custodians, including Charles Schwab, Fidelity, E-Trade, and TD Ameritrade, do not change fees on your account. If you are not yet eligible for your new company’s 401(k) you can add to the IRA to prevent a break in your savings, although total contribution are limited to $5,500 a year and income limitations apply to Roth IRAs. Most importantly, an IRA drastically increases your investment options. 401(k)s are typically restricted to a short list of mutual funds, while IRAs allow you to invest in stocks, bonds, ETFs, and the entire universe of mutual funds. 

Occasionally it is more advantageous to roll your account into your new company’s 401(k). A 401(k) is protected from lawsuits and bankruptcy, while state laws vary may allow the inclusion of IRAs in those procedures. Another advantage to a 401(k) is that you can take a loan from your account. If you are in dire straits and need to use some of the funds in your account, you can access them through a loan without paying taxes or incurring a penalty. You must pay the funds back within a specified time period or upon leaving the company (voluntarily or involuntarily). If you do not pay back the funds it will count as a distribution and you will owe taxes. While 401(k) loans are tricky and should only be used under specific circumstances, it is an option available in a 401(k) that is not available with an IRA.

Some companies allow you to keep your 401(k) account in their plan even after you leave the company. This is generally not recommended unless you have a platinum 401(k) plan with low fees, access to institutional mutual funds at a lower cost, and unbiased investment advice that you can access after leaving the company. This is rare. Investigate thoroughly before choosing this option, you may be charged extra fees on your account and could no longer be eligible for the investment advice paid for by the plan.

The last option is to withdraw your funds from the plan. This is truly your LAST option! While available as a last resort, you should consult with a financial advisor before cashing in your 401(k). The entire amount will be included in your income at the end of the year (unless it is a Roth) and you will owe a 10% penalty for withdrawing prior to age 59½. Your 401(k) plan should have a plan advisor available for you to talk to who can help weigh it against your other options.

So as you ride off to the next great adventure of your career, remember to take with you the knowledge you’ve acquired, the experience you’ve gained, the connections you’ve cultivated…. and the retirement savings you’ve worked so hard to build.

2013 Financial Checklist- 10 Steps for Money Success in the New Year

Happy New Years! I only have your attention for a few minutes until those other resolutions take over, so before you start scanning posts of perfect abs in three minutes a day take some time to go through these short-n-sweet steps and prepare yourself for money success in 2013. 

1.     Take Financial Inventory

Make a list of all your assets (checking and savings accounts, 401(k)s, IRAs, property) and add them up. Now list all your liabilities (student loans, mortgages, credit card debt) and subtract them from your assets. Is the resulting number positive or negative? How has it changed since last year? Check whether you have any duplicate accounts to consolidate, and check the interest rates on your savings accounts, loans and credit cards to see if you can get a better deal elsewhere. Bankrate.com is a good tool for comparing rates. Save this list for future reference and make sure someone close to you could access it if anything happened to you.

2.    Review Your Cash Flow

Notice a difference in your first paycheck of the year? One tax cut not extended this year is the 2% payroll tax holiday, which means your paycheck just shrunk by 2%. Don't be fooled by the name "payroll tax," this increase affects the self-employed too. Revisit your budget to identify areas you can reduce by that amount and make sure you continue to allocate enough to savings while keeping your expenses to manageable levels (see The "B" Word). Start planning now for large expenses in the coming year—hey, imagine if you saved for Christmas all year long instead of waiting until the end of the year?

3.    Set Financial Goals  

What do you hope to accomplish financially in 2013? Where would you like to be in one year, and in five years? Set a few short-term, mid-term, and long-term financial goals and monitor your progress each year. Defining your goals is the first step to achieving them!

4.    Check Your Credit Report

Your credit score affects everything from the interest rate on a mortgage or loan to your ability to rent an apartment or get a job. Make sure you know where you stand by monitoring your credit reports regularly. Annualcreditreport.com allows you to check your credit report from each of the three reporting agencies annually for free. Check for suspicious activity that could signify identity fraud.  

5.    Adjust Retirement Savings

The maximum contributions for retirement savings increased for 2013, so you can now contribute up to $17,500 to a 401(k) and $5,500 to an IRA. Too high for you right now? Try increasing your current contribution by 2% of your income each year until you get to the max. The maximum income levels to contribute to an IRA have also changed. If you are eligible for a company retirement plan, you lose your ability to deduct all or some of your traditional IRA contribution if your AGI is over $95,000 for married couples or $59,000 for singles. Similarly, your eligibility for Roth IRA contributions starts phasing out at  $178,000 for joint filers and $112,000 for single filers. You may need to revise your retirement savings plan if recent raises or bonuses push you over those levels. Finally, check whether your company has changed any of your 401(k) features. Is there increased/ decreased contribution matching?  Are matches now made in company stock? Do then now offer a Roth 401(k) option? Make sure you are taking full advantage of your company plan, they should have a plan advisor available to help simplify the features and answer any questions.

6.    Automate!

Make 2013 the year of simplicity. Automate your bill paying to avoid late fees and missed payments, and make sure you keep enough in your checking account to cover them. If you are worried about your cash flow you can always set up bill pay for minimum payments and then manually pay off the rest of your bill each month. Just as important is automated savings. Request that your direct deposit be split between your savings and checking account, or set up an automated transfer between the accounts each paycheck. Putting money away for the future can be tough for us spenders, so make it as painless as possible.

7.    Review Your Investments

The US stock market, as represented by the S&P 500, was up 16% in 2012, while the international indexes were up over 17% (EAFE). This means your equity holdings likely increased and are now a bigger piece of your portfolio. Take some earnings off the table by rebalancing back to your appropriate asset allocation. When looking at performance compare all of your holdings against their best-fit benchmarks to compare apples to apples. Make sure your portfolio is properly diversified and aligned with your financial goals.

8.    Review Your Insurance

Did your homeowners and car insurance increase in 2012? Shop around to see whether your rates are still competitive. The new health care laws have caused some employers to change policies, so take time to review the terms of your health coverage. And if you have dependents you should have life and disability insurance, confirm each year that the amount is enough to satisfy your family’s needs.

9.    Review Your Beneficiaries

401(k)s, IRAs, and insurance policies are examples of accounts with beneficiary designations. These accounts pass to the named beneficiary regardless of what your will states. Make sure to review your beneficiaries often, especially if there have been any marriage, divorce, births, or deaths in your family.

10. Charitable Planning

Do you have funds budgeted for donations, but end up just giving haphazardly to whichever charities catch your eye that year? Make a plan now to determine now how you want to spend your donation dollars throughout the year. Consider giving a monthly amount to organizations important to you, it is advantageous to your cash flow and that of the organization. After allocating funds to the non-profits/ schools/ churches closest to you, earmark an amount for “emergency” giving. Similar to an emergency savings account, these funds are for requests that pop up along the way, whether a friend’s fun-run or next year’s big natural disaster. 

May 2013 find you healthy, wealthy, and wise!

photo credit: Daniel*1977 via photopin cc

This post is for informational purposes only. Like most things published on the internet it is best taken with a dose of common sense. It is not meant as tax, investment, or legal advice. Your personal situation may differ, so consult with an expert for customized financial planning.

What's Your Money Mission for 2013?

Happy 2013! A new year, a new start, and a good time to evaluate your goals and commitments for the future. I appreciate the symbolism of the end of one year and the beginning of the next that invites us to take note of our accomplishments and growth, and examine how we want to better our lives.

Financial goals remain at the top of New Year’s resolutions. Pay off debt. Save more. Spend less. Earn more. Stress less. What people really want is to feel in control of their financial situation, and a whirlwind of holiday spending can leave you with a painful money hangover come January. Some people write resolutions, others set goals. The best way to start the year, however, is by defining and examining your life mission, your reason for being and comprehensive life philosophy. And since this is a financial blog, I am going to discuss the practice of actualizing your money mission statement.

What is a Money Mission Statement?

A money mission statement is a written declaration of your values and purpose that is meant to guide you and your family through your financial decisions. Money is not an end unto itself; it is a tool that enables you to live your dreams. So what does money mean to you? Does it provide security, flexibility, access? Does it allow you to provide for your family, explore the world, or help others?

Your money mission statement is unique to you and, unlike goals, does not change. While incredibly powerful on the individual level, it is even more so when you discuss with your spouse/ partner/ kids/ parents and create a family mission statement. I recommend doing this exercise alone for your personal money mission statement, and then again with your family for your family mission statement. Many couples are comprised of opposite money personalities, which can be advantageous to you as a team but a cause of frustration, resentment, and secrecy if not addressed. Be sure to include your kids in this process as well. It is easier to say yes or no to the newest gaming system if you can discuss how that decision fits into the money mission statement that your family laid out together.

Reflection Questions

Begin defining your money mission by reflecting on what is truly important to you, and what you want to accomplish in your life. Here are a few questions to get you started:

When am I most happy?

When do we feel most connected? (For couples/families)

If money were no option, what would I do for a living and why?

How can I best contribute to the world?

Where will I be as an individual in (5, 10, 20) years?

Where will we be as a family in (5, 10, 20) years? (For couples/families)

Where will I/we be financially in (5, 10, 20) years?

What does an ideal retirement look like?

What five things do I value most in life?

How would I like to build my wealth?

How do I want to spend my money?

How do I want to invest my money?

How do I want to give my money?

Reflecting on the questions will give you a good idea of your money values. Now to put it all together as a mission statement! You can use any format that speaks to you, I really like this one:

I/ our family strives to make an impact on the world by ___________. I/ we value __________________. I/we seek to build wealth by ______________. I/we seek to spend __________________. I/we seek to give to ___________________. My/ our commitment to savings allows __________________.

My personal money mission statement:

I strive to make an impact on the world by living a financial stable life that feeds my passion for family and friends, travel, food, and music, and allows me to share my time and resources with others. I value personal relationships, unique experiences, continual learning and growth, and engagement towards social good. I seek to build wealth by creating value for my clients and enhancing their lives while also enhancing the local and global community. I seek to spend consciously on items and experiences that bring me joy and to fully appreciate them. My commitment to savings allows me the financial independence to pursue my passions.

Now the next time you have a financial decision to make, you can use your money mission statement to guide you. If it is hard for you to part with money, it should help you acknowledge when it is time to spend. If you struggle to budget, it should help clarify why you want to allocate your hard-earned funds towards certain purchases over others. Most importantly it should help you gain control over your financial life and align your finances with your values.

Here’s to a health, wealth, and wisdom in the new year! Please share your experience building a money mission statement, I’d love to hear how it works for you.