It’s 4 AM: Do you know where your retirement accounts are?

Porto Alegre at nightPhoto courtesy of Gordon

I just remembered that I have a gift card with money on it that I haven’t yet spent. The gift card is for Williams-Sonoma, a nice place for sure, but looks like I’ll be able to afford only a pot holder or half a pair of tongs.

Tongs

If you have to ask, you can’t afford it.

I’m not alone in not spending my gift cards. According to Barron’s, $1 billion in gift cards went unredeemed in 2015. And that’s down from $8 billion in 2007!

I think with that kind of money, we could go to Williams-Sonoma and afford a whole pan.

But it’s not just gift cards that people are forgetting about. People are also forgetting about entire retirement accounts!

It’s not difficult to do. People will change jobs an average of around 5 years, so if you’ve been working for over a decade, you’ve likely accumulated a few retirement accounts.

And when you switch jobs, retirement accounts from your old job are probably the last thing on your mind.

But I’d like you to rethink that. Because even though a forgotten account is still yours (and is still recoverable, unlike, say, a lost gift card) it still behooves you to keep track of your retirement accounts and keep them active.

4-0-what?

A 401(k), for those who never knew the actual definition is:

[A] defined contribution plan where an employee can make contributions from his or her paycheck either before or after-tax, depending on the options offered in the plan. The contributions go into a 401(k) account, with the employee often choosing the investments based on options provided under the plan. In some plans, the employer also makes contributions such as matching the employee’s contributions up to a certain percentage.

(The odd name just refers to the section of the Internal Revenue Code in which it appears.)

In most cases, the plan is tax-deferred, meaning that you contribute to it on a pre-tax basis. This means that the amount of money you have in these accounts is not the amount of money you can ever get access to, in the same way that someone who makes $50,000 a year never gets $50,000; taxes will need to eventually be paid.

You can’t contribute to a 401(k) (or its related 403(b) and 457 plans) when you leave the job that was associated with it. But luckily, you can “take it with you”. A 401(k) can be freely converted into a Traditional IRA.

(Note to savvy investors: If you have a Roth 401(k), it can be freely converted into a Roth IRA too. But those are not as common, and so I won’t be talking about them here.)

What this means is that you remove your assets from your company’s plan and transfer it into a plan of your choosing. Since a Traditional IRA is tax-deferred as well, you can initiate a “direct transfer”, and you don’t need to worry about paying any fees.

Benefits of transferring

This process is actually really easy, in my experience. In many cases, you can do everything over the web, just by filling out a form or two, and then letting the two companies hash things out.

And it can save you money as well. Often, 401(k) plans can charge fees (which are annoyingly hard to determine), so if you can locate an IRA vendor that isn’t known to charge as high fees, you’ve upped your investment return right off the bat.

Also, your 401(k) can often have a limited number of funds one can invest in. They may be great funds (or not) but you still should have the choice in what you invest in. Transferring to an all-purpose IRA vendor and you’ll be able to invest in whatever you want.

Where to transfer

The biggest decision you have to make is what institution to transfer your money to.

NerdWallet has a list of contenders for you to peruse, but if you get a little overwhelmed with choice, I can make a decision for you: Go with Vanguard. (No, I’m not getting any commission for this.) Vanguard has low fees, low overhead, low headaches, and plenty of choice. I use Vanguard for all of my investing not associated with an employer, and can wholeheartedly endorse them.

And one last warning: It’s important, when transferring any assets, that you do a direct transfer. This means that you should never see the money in your hand! The reason why is because of taxes. If the plan pays out to you, it’s counted as income, and you’ll need to pay taxes on it (and penalties as well). So make sure you go direct.

Finding your old 401(k) plans

What if you can’t find your old 401(k)? What if you worked for a company that doesn’t exist anymore? These are real concerns, and the site at 401(k) Help Center has some suggestions on how to look up your account. You can search the Abandoned Plan Database or the National Registry of Unclaimed Retirement Benefits, two of the coolest-named sites I’ve found in quite a long time.

Be intentional

Aside from any financial benefits, transferring your old employee retirement plans into a self-directed plan forces you to be intentional. No longer is your retirement plan just some thing that happened as part of your paycheck. This is your life and your money. It’s time to take control of both. This is an easy and quick way to help accomplish that, at least in a small way.

Don’t let your money get away from you. Your retirement is not a gift card.

But enough about me. Are you aware of all your retirement accounts?

Mike Pumphrey

Mike Pumphrey

I'm the founder and author of Unlikely Radical, a site to help people succeed with money, achieve their goals, and live intentionally.

I offer a free phone consultation to anyone who is interested in changing their financial narrative. Are you ready? Click here for details.
Mike Pumphrey
Posted on April 25, 2016