How to Roll Over a 401(k) Plan When You Change Jobs

When you accept a new job with a new company, you need to decide what to do with the money in your 401(k) plan. Here are your options.

1. Leave the money in your former employer’s 401(k) plan

While this is typically an option, and your funds will continue to grow tax-deferred, it may not be the best option. For starters, once you move to your new place of employment, you’re no longer able to contribute to it. Another possible deterrent is the fact that your former employer could switch 401(k) providers or get bought out by a different company. Both scenarios would potentially leave you in the dark in regards to your account number or login information. However, if your new employer requires employees to work a certain length of time at the company before permitting them to partake in the 401(k) plan, leaving your 401(k) funds with your former employer temporarily might be a good game plan.

2. Roll your 401(k) to your new employer’s plan

If your new employer allows rollovers, you can have your 401(k) funds directly transferred to your new employer’s plan. This is called a “trustee-to-trustee” transfer: assets from one trustee or custodian of a retirement savings plan are transferred to the trustee or custodian of another retirement savings plan. By having your 401(k) funds directly transferred following federal rollover rules, you’ll avoid having federal income tax withheld, and your money will be easier to manage in one account. You can also have the funds transferred to a new or existing IRA.

3. Transfer your plan via an indirect rollover

Another possible alternative is to roll the funds over to another employer-sponsored retirement plan by having your 401(k) distribution check made out to you, and then depositing the funds to a new retirement savings plan. However, this particular move will require that 20 percent of the taxable portion of your distribution is withheld for federal income taxes. And if you wait beyond 60 days to redeposit the funds, the full amount of your distribution will be taxable.

Whichever way you choose to move forward with your 401(k) plan, you should be aware of rollover fees. Typically the fee is only a minimal one-time fee, but it’s worth checking in with your 401(k) provider to discuss this as well as any other questions you might have.

IRS Reminds Taxpayers Tax Day 2018 is the Last Day to Claim 2014 Returns

Although it might be difficult to imagine not claiming a tax refund, the IRS has estimated that nearly 1 million Americans have not claimed tax refunds from the 2014 tax year (filed in 2015), refunds that total over $1 billion. The IRS is also reminding taxpayers that they have until this year’s official tax day (April 17) to file those returns and receive their refund. The average refund owed from the 2014 tax year is $847 and taxpayers have three years from when they are supposed to file to claim a refund. After that time, the funds are considered property of the U.S. Treasury.

If you are owed a refund, there is no penalty for filing late, however, you must also have filed (or currently file) for your 2015 and 2016 returns. Refunds from 2014 will first be applied toward any money owed to the IRS or a state tax agency, and can also be used toward past due federal debts such as unpaid child support or student loans. Failing to file a return for 2014 could cost some taxpayers more than just an $850 refund; low or moderate income workers could be eligible for the Earned Income Tax Credit (EITC), which was worth as much as $6,143 in 2014.

So why did so many Americans fail to claim their refunds?

  • As mentioned, many taxpayers fail to apply for the EITC. To qualify, your income must have been below $46,997 (or below $52,427 if married filing jointly) and you claimed three or more qualifying children;  $43,756 for those with two qualifying children ($49,186 married filing jointly); $38,511 for taxpayers with one qualifying child ($43,941 married filing jointly); and $14,590 for people with no qualifying children ($20,020 married filing jointly).
  • If you make under a certain amount annually, you do not have to file taxes. In 2014, single Americans over the age of 65 who earned less than $11,500, singles under 65 who earned $10,000 or less, or those married filing jointly who made less than $20,000 did not have to file. However, even though they did not have to file does not mean taxes were not taken out of their paychecks, which means those taxpayers could be owed a refund. Those who made estimated tax payments that year could also have overpaid in taxes, earning them a refund.
  • Many students or their parents fail to claim the American Opportunity Education Credit, which allows education-related expenses such as course books, room and board, tuition and other education supplies and equipment to be deducted. In 2014, the credit maxed out at $2,500.
  • Some individuals move and do not update their addresses correctly, which means refund checks and sent back to the IRS and left unclaimed. Other individuals simply forget.

How can I claim my money?

If you did not file for the 2014 tax year, and you think you may be owed a refund, the IRS suggests that you find applicable tax documents such as your W-2, 1098, 1099 or 5498 for the 2014, 2015 and 2016 tax years. If you are unable to find these forms or get them from your employer, act quickly and request a wage and income transcript from the IRS on their website or by phone at 800-908-9946, as transcripts can take between 5-10 days to be received in the mail.

No Employer 401(k)? Here’s What To Do

For some employees, simply opening a Roth IRA or another retirement account independent of your employer may be sufficient and necessary. But many employees should consider digging into the details of why your employer does not offer a retirement savings plan. And if you think your company is one of the few who doesn’t offer one, unfortunately, nearly half of U.S. companies don’t provide their employees with a 401(k).

When it comes to smaller firms, many avoid the offering simply due to high start-up costs and time commitments, as administering the plan and ensuring it meets regulatory requirements can take serious time and attention. Retirement offerings also present significant liabilities for firms, including civil or criminal penalties for plan administrators if legal and regulatory compliance is not met. According to the Census Bureau, the combination of fees, time and risk may be why over 90% of small businesses do not offer a 401(k). Others may simply not be aware their employees desire a plan.

Like your company, but want help saving for retirement?

If you would like to see your company add a 401(k) plan, the first step is talking to other employees to determine the collective interest in a plan and how many individuals would “buy in” if offered one. Your employer may not be persuaded by one employee’s desire for a plan, but a group request will likely garner more weight. Remind your employer they would also reap benefits from a business standpoint (lowering taxes) and a personal standpoint (their own retirement savings).

Step two involves doing your homework. Is your boss concerned about the risks involved? There are plans whose providers will share legal responsibilities, so research plans and present several options to your supervisor. Is time or added work/stress the issue? Talk amongst your co-workers and determine a strategy for divvying up duties so one person isn’t burdened with added responsibilities. Supportive plan providers can also help companies create a structured strategy to manage the extra work

Overcoming hurdles to a company 401(k)

What if cost is my employer’s biggest concern? Plan start-up fees can sound daunting to small firms, but consider the company’s spending and ways those costs could be mitigated or offset, such as through tax savings or by redistributing the holiday party budget to cover expenses. Inform your employer that many employees might prefer or expect a 401(k) over a holiday party, so using those funds could attract and retain quality employees.

Being prepared and showing your boss that the added time and effort is advantageous will go a long way. Offering a 401(k) can grow their business, supplement their goals and maintain and engage new employees, which is critical in today’s job market. Taking the time to research beforehand and help whoever is in charge throughout the process may seem like the last item you want to add to your plate, but the benefits are twofold for you as well. Not only will you be able to start saving for retirement in a tax-advantaged way, but your employer may also notice your strategic drive, organization and initiative, which could benefit you as new company opportunities or initiatives arise.

Related Article:

Millennials and Roth IRA’s: Why the Two Make a Perfect Pair

Will the New Tax Laws Affect Your Education Plans?

While it can be difficult to live debt-free in today’s world, many American adults attribute a majority of their debt to educational loans. In fact, recent statistics show that Americans owe approximately 1.48 trillion in student loan debt and about 44 million Americans are currently paying on their student loans.

The recent conversations around tax reform had many students and those still paying their loans concerned about what the tax changes would mean for their debt-to-income ratio. Early proposals suggested the repeal of student loan interest and educational assistance deductions, as well as tax-free tuition waivers, which certainly left many feeling uneasy. The proposed changes would have removed around $2,500 in deductions and would have considered tuition waivers and employer-assisted tuition as taxable income, effectively bumping many into higher tax brackets.

Luckily, when the final legislation was passed in December of 2017, none of these changes were included. But, what changes were in the final bill that could affect your education and how you save for it?

One significant amendment is the expanded usage allowed under Section 529 accounts, which are tax-advantaged savings and prepaid tuition plans intended to encourage taxpayers to save for college sponsored by educational institutions, states or state agencies under Section 529 of the IRS code. As of 2018, qualifying distributions from Section 529 accounts include tuition for elementary and secondary schools as well as tuition for private, public or religious college institutions. At the federal level, funds are limited to $10,000 per student during a taxable year, however, states have the option to enact a different approach at a state income tax level.

While Section 529 accounts saw expanded usage, Coverdell Education Savings Accounts, which allowed taxpayers to set aside up to $2000 a year in tax-free money for college education, will be phased out under the new tax laws. Since employer-assisted tuition was left unchanged under the new code, employers can still contribute up to $5,250 a year to an employee’s qualified continuing education. The student loan interest deduction of up to $2,500 was also left intact, however, if you make more than $80,000 as a single filer or $165,000 as joint filers, you no longer qualify for this deduction.

While many deductions and educational credits were kept under the new legislation, taxpayers should still be wary of the implications of long-term loan repayment options and deferring loans. Determining the best strategy for repaying loans quickly and educating yourself on ways to reduce the tax implications on current loans will likely leave your credit and your taxes intact and manageable in the future.

IRS Warns of Continued Phone Scams During Tax Season

Although taxpayers should always be on the lookout for scammers and fraudulent activity, tax season is a time to be especially wary of unknown emails or phone calls. Aggressive phone scams where criminals call posed as IRS officials are extremely common and are a part of the “Dirty Dozen” list of tax-related scams targeting taxpayers. The Dirty Dozen is a list compiled annually by the IRS citing common recent scams taxpayers should be aware of.

How do these scams work? Frauds will make unsolicited calls claiming to be from the IRS and demanding individuals pay counterfeit tax bills. They may also send phishing emails or leave “urgent” phone messages with requests to call back immediately if you do not pick up. If successful, scammers will persuade their victims to send them cash either via prepaid debit card, gift card or wire transfer. Phone scammers often threaten their victims with deportation, arrest or driver’s license repeal in an attempt to bully taxpayers into sending the money.  

To further convince their victims, criminals can modify the caller ID number to appear like the IRS or another federal agency and use IRS employee titles and fake badge numbers to make the call appear official.  Frauds may also refer to the victim’s name, address or other personal information to persuade individuals of their legitimacy. Since October of 2013, the Treasury Inspector General for Tax Administration (TIGTA) has been made aware of 12,716 individuals who, due to phone scams, have paid over $63 million collectively.

The IRS also wants to remind taxpayers that while aggressive and threatening phone calls will always be a strategy used by scammers, especially during tax season, criminals do change their tactics and employ versions of this scam year round.

As a continued reminder, below are strategies frauds will use that the IRS will never use:

  1. Call via phone to demand payment using a specific payment method such as wire transfer. The IRS will mail a bill first if taxes are owed.
  2. Order that taxes be paid without allowing taxpayers to appeal or question what is owed.
  3. Ask for credit or debit card numbers over the phone.
  4. Threaten to include local police or other law enforcement for lack of payment.
  5. Call regarding a refund.

If you receive a call and think you may owe taxes, hang up immediately and call the IRS directly at 800-829-1040. If you know you do not owe taxes or are unsure, do not provide any information over the phone. Hang up and report the call the the TIGTA as well as the Federal Trade Commission. The TIGTA can be reached by phone at 800-366-4484 or on their website on the IRS Impersonation Scam Reporting page. To contact the Federal Trade Commission, go to FTC.gov and visit the FTC Complaint Assistant page and include IRS Telephone Scam in your notes.

IRS Provides 2018 Updated Withholding Tables

With the passage of the new tax legislation last month, the IRS must take several steps to update withholding accuracy in accordance with the new laws. Their first major step consisted of updating the withholding tables for employers to follow, and those updates were posted on the IRS website January 11.

The IRS would like employers to begin using the new rates listed on the new tables as soon as possible and to continue using the 2017 tables until they have done so. However, employers must implement the new tables by February 15, 2018, at the latest. As soon as employers make those updates, employees will begin to see their paychecks reflect those changes, which could result in an increase in net pay for many taxpayers. The new tables are also designed to function with the current W-4 withholding forms, which should allow for a simpler transition for both employees and employers.

The new withholding tables are intended to reflect changes in rates and brackets, the repeal of some personal exemptions and the increase in the standard deduction enacted by the new tax laws. Additionally, the tables are meant to generate the correct withholding amounts for those with simple tax situations, as well as avoiding under or over-withholding taxes when possible.

Other items the IRS plans to update or revise include the withholding calculator on their website and the Form W-4. Many taxpayers use the IRS calculator to determine their own withholding, and the IRS expects the new calculator to be ready for public release by the end of February. Although the new Form W-4 may take a bit more time to revise, it should reflect changes in itemized deductions and increases or repeals of some credits. Employers are encouraged to continue using the 2017 Form W-4 until the new form is released.

For those beginning new jobs in 2018, for workers who have had personal life changes or for those who would simply like to update their withholding in light of the new laws, the revised calculator and Form W-4 can be used to make any withholding updates once they are released. Although the IRS is planning to educate taxpayers about the new withholding standards, workers are encouraged to find out more information regarding the changes on the IRS Withholding FAQ page.