Review Your 401(k) and IRA To Maximize Saving

Should you consolidate your old 401(k) or increase your current contribution?

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If you are starting a new job or haven’t contributed to your retirement recently, it’s a good idea to review your existing 401(k) and IRA plans. You may have money in investments with high fees and low returns. By reviewing your old retirement accounts, you might choose to move your old 401(k) account to a new retirement account, rollover into an IRA, or leave your 401(k) alone.

There are some benefits to each choice, so consider all your options. Keeping track of your retirement accounts is important to understanding whether you are meeting your financial and retirement goals. 

Learn what rollovers are, why you may want to consider rolling over your old 401(k) account, and why it is a good idea to review your retirement contributions. Reviewing your 401(k) and IRA should not take much time.

Key Takeaways

  • Checking old retirement account balances helps you keep track of your money and understand whether you are meeting your financial goals.
  • A direct rollover from an old 401(k) to a new employer retirement plan may make sense if investment choices and fees in the new plan are better, and to consolidate accounts for easy tracking.
  • A rollover IRA is an IRA funded by money from old retirement accounts.
  • A rollover IRA may be beneficial if you want access to more investment choices, lower fees, and to consolidate accounts.

Rollover Old Retirement Accounts

While old retirement accounts may be something you forgot after you left the job that gave it to you, a quick review of them may end up saving you money and help you achieve your financial goals.

The majority of 401(k) plans operate fairly and efficiently, but checking your old retirement accounts can alert you to any potential problems with your plan, such as:

  • An inaccurate account balance
  • Investments your administrator made without your permission
  • Losses that can’t be explained by market performance

If there is an issue with your old retirement plan, first contact the plan administrator, or if you need more assistance, call the Employee Benefits Security Administration.

In addition to looking for irregularities, examine your contributions, the gains on your contributions, any fees you pay, and the types of investments offered. 

Switching the types of investments could result in lower fees and could result in additional investment gains for you. Sometimes this is only possible by moving the money from an old retirement account to a different account, such as one offered at a new employer or through a rollover IRA. 

Consider the following options when reviewing your old 401(k) retirement accounts.

Direct Rollover from Old 401(k) to Your New Account

To do a direct rollover, you first need to set up a retirement account at your new employer. Once this is complete, your old financial institution or retirement plan can transfer the money you had in your old 401(k) into your new retirement plan. No taxes will be withheld from the amount you transfer.

The advantage of a direct rollover is that your retirement accounts are consolidated into fewer plans, which may make it easier for you to track. One of the potential drawbacks is your new retirement plan may offer fewer investment choices.

Open a Rollover IRA

If you don’t have a rollover IRA, you can open one up at many financial institutions. A rollover IRA is similar to a traditional or Roth IRA except that you fund it with money from previous retirement accounts. Once you open a rollover IRA account, you can contact your old financial institution or retirement plan and have them directly transfer the money into the rollover IRA.

There are many benefits of rolling over your 401(k) into an IRA, such as more investment options, potentially lower fees, and a consolidation of retirement accounts. One of the drawbacks is that sometimes money is withheld if you don’t do the rollover the right way, or the funds may be paid to you rather than into the new rollover IRA and taxes may be withheld.

A direct rollover is less costly than withdrawing money from a plan yourself and having to come up with additional funds to make up for the money withheld.

Leave the Old 401(k) Alone

If you don’t want to consolidate accounts into your new employer’s 401(k) or rollover IRA, you could leave your money in your old 401(k) retirement account.

The advantage of keeping your old 401(k) account is that it may provide strong returns with low fees. If you like the investment choices in an old 401(k), it may be another reason to stay in your old 401(k) retirement plan. If not, you can change your investment choices.

The drawbacks are you can’t make additional contributions to the account; some employers may charge a higher fee if you are not an active employee; and there are more accounts to manage as they are not consolidated into fewer accounts.

Former employers may automatically cash out your old 401(k) if the balance is less than $1,000.

Action to Take: Increase Retirement Account Contributions

A good way to ensure you are on track to reach your financial goals is to consider increasing your retirement contributions. Boosting your contributions isn’t just for those who have old retirement accounts, but for anyone with a retirement account.

For example, by increasing contributions when your wage increases and ensuring you take advantage of any employer match, you can dramatically increase the money you will have in retirement.

If you choose to increase your contributions, it’s important to know what your contribution limits are.

Retirement Contribution Limits and Rules

The current 401(k) individual contribution limits for 2022 are:

  • Age 49 and under: $20,500
  • Age 50 and older: $27,000

Your employer can also contribute a limited amount to your 401(k). The total amount that can be contributed to a 401(k) by both you and your employer can’t exceed:

  • Age 49 and under: $61,000
  • Age 50 and older: $67,500

There are other versions of 401(k)s that have different contribution rules, such as 401(k)s for those who are self-employed. For a traditional IRA, the maximum contributions are $6,000 in 2022.

When To Increase Contributions

The earlier you put money in a retirement account, the better, because your money will have more time to compound its returns. For example, if you max out your 401(k) retirement contribution each year ($20,500) until you’re 50, then in 30 years, assuming a 7% average annual return, you will end up with nearly $3 million dollars.

You should also increase contributions if your employer match isn’t maxed out. Matching effectively allows you to receive a 100% return on your money, as you get 100% of it automatically added to your account (subject to the employer’s contribution cap). If you are not currently obtaining the full match by your employer, you are letting some of your employee benefits go unused.

If you get a raise or a bonus at work, consider increasing contributions, as your wages have gone up but your expenses did not increase. You can save the additional income for retirement, which can help you reach your financial goals earlier.

How To Change 401(k) Contributions

You can change your 401(k) contributions in any active plan by contacting the plan administrator or financial institution. Most plans will not allow you to increase your contributions beyond the 2022 contribution limit. You can check with your current plan to ensure that contributions stop once you hit the contribution limit. Contributing more than the contribution limits will lead to taxes.

Frequently Asked Questions (FAQs)

What is a 401(k) rollover?

A 401(k) rollover is when an old retirement plan is “rolled over” to another retirement plan or an IRA.

How do I find my old 401(k) accounts?

You can find your old 401(k) accounts by contacting previous employers, or you can search for unclaimed retirement benefits in the National Registry of Unclaimed Retirement Benefits. However, not all employers register unclaimed benefits.

How long does it take to roll over an old 401(k) account to an IRA?

The IRS gives you 60 days from the date you receive a 401(k) distribution to roll over into an IRA. However, you can complete a rollover to an IRA in a few days to a few weeks. You need to have an IRA already opened or first open up an account at a new financial institution, then contact your old 401(k) plan administrator or financial institution to fill out paperwork to roll over an old 401(k).

What is the limit for 401(k) contributions in 2022?

The 401(k) individual contribution limit in 2022 is $20,500 for individuals who are 49 years old or younger, and $27,000 for those individuals who are 50 years or older.