The history of 401(k)s is a surprisingly short one — brief enough that there are undoubtedly people in today’s workforce who began contributing to a 401(k) when the option was first introduced.

401(k) plans grew out of the Revenue Act of 1978, which went into effect in 1980 and was designed as a way to provide a tax-free way for employees to defer compensation from bonuses and stock options. Employers soon saw the potential to create tax-advantaged retirement savings plans for employees as well. In 1981, the Internal Revenue Service began allowing employees to make such contributions toward their retirement, and 401(k)s became an increasingly common retirement option offered by employers. 

In 1996, the amount held in 401(k) plans in the United States reached $1 trillion. In this same year, 401(k) Day was established on the first Friday after Labor Day.

401(k) Day is an excellent time to educate yourself about your retirement options and your current plan. Here are some helpful steps you can take:

Reviewing your 401(k)

Life is busy, so it’s easy to lose sight of your 401(k)’s performance. 401(k) Day can help remind you that checking in on your 401(k) at least once a year is advisable, with more frequent reviews as you get closer to retirement. This process allows you to assess the account’s performance, identify any potential problems, and make changes as needed.

Your review should include:

• The contribution amount: Aim to maximize your 401(k) contributions, saving as much money as possible while still retaining a comfortable debt-to-income ratio (below 36 percent) for your ongoing expenses. Make sure you’re saving at least as much as your employer is willing to match; not doing so is essentially leaving free money on the table.
• Performance indicators: Check the growth of your investments and compare them to overall market performance as reflected by major indexes like the Dow and S&P 500. Adjust your investment mix if your portfolio is underperforming or does not align with your retirement goals.
• Your risk tolerance: Assess how comfortable you are with the current markets, and whether you want to pursue safer, low-risk investments or higher risk investments that will potentially yield higher returns.
• Expense ratios: Higher expense ratios will hamper the growth of your 401(k) and lead to lower returns over time. Review these ratios and explore options for lowering them.
• 401(k)s from previous jobs: Accounts left with a former employer have more limited growth potential, and can be lost entirely if you forget about them. Check for former accounts using the Labor Department’s Employee Benefits Security Administration search tool, and roll any former 401(k)s to your current plan or to an IRA.
• Beneficiary information: Your 401(k) should designate beneficiaries who will receive the account’s assets in the event of your death. Update these beneficiaries if necessary.

Is your 401k on track with your retirement goals?

One of the favorite phrases at Grey Ledge Advisors is, “You have enough.” It’s always rewarding to tell a client that they’ve saved up enough money to retire.

You’ll need to carefully weigh a number of factors before you get to this point. Does your 401(k) have enough money to support your basic needs such as housing, health care, food, utilities, and transportation? Are you planning to make any lifestyle changes, like traveling more? Do you want to leave money to your heirs or charitable causes? Will your 401(k) savings be able to keep up with anticipated inflation?

Some common retirement savings goals include having 10 times your annual salary on hand at the time of your retirement, or having enough that you can meet your expenses by withdrawing only 4 percent of your retirement savings each year (which will make the account last 30 years). You can also use a retirement calculator to determine the savings you’ll need to comfortably retire.

Everyone’s circumstances are different, and 401(k) Day is a good reminder to set up a meeting with a financial advisor. These professionals can review your 401(k), offer personalized guidance, and determine what changes are necessary. 

Is it time for a change?

By reviewing your 401(k) at least once a year, you can update it to better reflect your current circumstances and your retirement goals. Rebalancing is a process where you reallocate your asset mix to adjust your risk tolerance and pursue higher-performing investments.

Some common reasons for rebalancing a portfolio include:

• Life events: Personal circumstances such as change in income, the birth of a child, unexpected health care expenses, or higher education costs will affect how much money you can comfortably contribute to your 401(k). This, in turn, will affect other factors such as your risk tolerance and financial goals.
• Market performance: Periodic rebalancing allows you to adjust your investments based on current market performance and forecasts. It also allows you to adjust your asset allocation if certain investments are underperforming.
• Updated goals: If you’re seeking to move up your retirement date, or push it back, rebalancing lets you adjust your 401(k) accordingly.

What if I don’t have a 401(k)?

You may not have a 401(k) if your employer doesn’t offer retirement benefits, if they offer a different type of retirement plan, or if you’re not eligible for your company’s 401(k) plan. Alternatively, you may have simply neglected to sign up for an employer’s plan, or opted out due to financial constraints. You may also lack a 401(k) if you’re self-employed.

401(k) Day is a good time to research the options available at your workplace and explore other retirement options, such as solo 401(k)s that can support a self-employed person and their spouse. Consult with a financial advisor to review your budget and set up a savings plan; even a small amount put toward retirement each paycheck can add up substantially over time. 

The professionals at Grey Ledge Advisors will offer the support necessary to get your 401(k) and retirement goals on track. Contact us today using our online form or by calling 203-453-9075.

The process of saving up for retirement, often done automatically through payroll deductions, is one that can easily retreat to the back of your mind. It’s important to take the time to periodically check your retirement savings plan to see if any adjustments are needed to better fit your circumstances and goals.

One of the simplest steps you can take: rolling over a 401(k) to an IRA, or individual retirement account.

In a 401(k), an employee makes pre-tax payroll deductions to an account sponsored by an employer, who may opt to match the employee’s contributions up to a certain point. If you leave your job for any reason, the employer’s contributions will stop and you will no longer be able to contribute to this account. 

An IRA is managed independently, allowing you to contribute some of your income toward this account, take more control over your investments, and have a retirement account that may  accept contributions, regardless of your employment status. The deductibility of an IRA contribution is phased out based on your income. 

If you maintain both a 401(k) and an IRA, however, you are limited in what you can personally contribute each year. Individuals under 50 who have both types of retirement accounts can contribute up to $23,000 to a 401(k) and $7,000 to an IRA; individuals ages 50 and older can contribute up to $30,500 to a 401(k) and $8,000 to an IRA.

Should you create a single retirement account by rolling over a 401(k) to an IRA? Here are some scenarios where this option might be a good idea:

You’re leaving a previous job

Depending on how much you have invested in your 401(k), your employer may not hold on to your retirement assets for you when you leave a job. For sums of less than $1,000, they can simply cash out the account and send you a check — with the sum being taxed at federal and state levels. If your 401(k) has between $1,000 and $7,000, you will need to move the money to the retirement savings plan offered by your new employer or into an IRA.

When a 401(k) account has a balance above $5000, you have the option of leaving the funds with your previous employer. The drawback of this approach is that you’ll no longer be able to make contributions to the 401(k), which limits your potential investment gains. You’ll also continue to pay fees on the 401(k) account, and your previous employer may increase these fees once you’re no longer with the company.

By moving your 401(k) balance to an IRA, you can resume contributions to the principal balance of your retirement savings. This, in turn, can potentially yield higher returns from your portfolio.  Many participants find that the variety of investment choices increases when they move the funds out of a company retirement plan.

For some 401(k) accounts, the rollover process can be more complex. For example, a 401(k) with a previous employer might have a substantial amount of the portfolio invested in the company’s stock, or you may only be partially vested in the plan and not yet able to receive the full employer match. A financial advisor can help you scrutinize these issues and plan the best path forward.

You want to consolidate retirement accounts

In today’s work environment, people are changing jobs more frequently as they search for career advancement opportunities, higher salaries, improved work-life balance, or a better corporate culture. This can lead to a person having several different 401(k)s with different plan types and asset allocations.

Rolling these 401(k)s into a single IRA offers a convenient way to manage all of your retirement assets. It eliminates the need to keep track of multiple different accounts, logins, investment options, and other information. Instead, you can manage one convenient portfolio that gives you a clear look at your retirement savings and helps you make informed decisions. 

Keeping your retirement funding in a single IRA isn’t putting all of your eggs in one basket, as you’ll be able to diversify your portfolio to manage risk. This approach also eliminates a certain risk factor that comes with leaving multiple 401(k) accounts behind with other employers. You might simply forget about an account, or have more difficulty accessing it if a former employer goes out of business or changes plan administrators.

You’re looking for more investment options

The investment choices in a 401(k) are chosen by the employer sponsoring the plan, and typically offer a more constricted range of investments. Most 401(k) plans have a limited range of investment choices, and you may only be able to select from a handful of mutual fund options. Most plans offer Target Date funds as an alternative for investors who are unsure of what to select as an investment option.

IRAs offer more diverse investment options, including mutual funds, exchange-traded funds (ETFs), certificates of deposit, annuities, and real estate investment trusts (REITs). This broader range of choices allows you to build a more diversified portfolio that better aligns with your risk tolerance and retirement goals. For example, younger workers with a longer time horizon may opt for stocks that can potentially offer higher returns, while those seeking to maximize their cost efficiency may opt for investments like ETFs and index funds.

You want to be more flexible with your retirement strategy

While the investment decisions in 401(k) portfolio are made through your employer, IRAs give you complete control over your portfolio. This allows you to quickly and easily make changes to your portfolio as needed.

For example, life events such as the birth of a child, purchase of a home, or increase in salary can all impact how much you can budget for your retirement, and may change your risk tolerance as well. Working with a financial advisor, you can update your IRA to make adjustments that take your new circumstances into consideration. 

IRAs can also offer better flexibility compared to 401(k)s in other areas as well. These portfolios generally have fewer restrictions when it comes to estate planning and choosing how funds will be distributed, and may offer more exceptions for penalty-free early withdrawals for purposes such as purchasing your first home or paying for higher education expenses. 

You’re dissatisfied with 401k provider

If you are keeping a 401(k) with a previous employer but unhappy about how it is performing or being managed, a rollover to an IRA offers a quick and easy way to update your retirement plan. You might choose this option if your 401(k) has anemic gains or frequent losses.

Be aware that active employees typically cannot roll over their 401(k)s to an IRA unless there is an in-service distribution clause allowing it. This clause may also specify a certain age, such as 59.5 or 62, when a rollover is permitted.

The team at Grey Ledge Advisors can discuss the process of rolling over a 401(k) to an IRA and whether this option is a good way for you to achieve your retirement goals. Contact us today by filling out our online form or calling 203-453-9075.

Changing jobs is an exciting time, but in the midst of the transition it’s easy to forget about your retirement savings. One common mistake people make is leaving their 401(k) behind with their old employer, which can also leave you with less control of your investments and awareness of how your portfolio is performing. 

As frequent career changes become more commonplace, it has become even more likely for retirement funds to be dispersed across multiple accounts. Research shows that the average person holds 12 jobs during their working life, or about once every four years. This can lead to quite a trail of retirement accounts at previous workplaces.

Rather than leaving your 401(k) in the hands of the former employer, you should consider rolling over these funds to an IRA when you switch jobs. This action will help you manage your retirement savings more easily and allow you to make more informed decisions about your financial future.

Why You Shouldn’t Leave Your 401(k) Behind

Keeping your 401(k) with a former employer’s plan is usually allowed as long as you have a sufficient amount of money in the account — $5,000 in most plans. Employees sometimes opt to keep their retirement funds with a previous employer because they’re satisfied with how the account is being managed. This approach is also much preferable to cashing out the fund when you depart a job, which can often result in an early withdrawal penalty plus a tax on the distribution.

In many cases, however, employees simply leave their 401(k) behind because they don’t think to move over the funds to a new retirement account, or because they think it will be too complicated or time-consuming to do so. They may believe that it’s wiser to leave the funds to mature in a separate account as a way of diversifying their retirement investments.

Unfortunately, leaving your 401(k) with a previous employer can also create several disadvantages for your retirement savings:

• Slower growth: While a 401(k) with your previous employer will continue to grow with market gains, you’ll no longer be able to contribute to it through payroll deductions. This will cause you to lose out on compounding gains, while also realizing smaller gains from any retirement account you start from scratch with a new employer.
• Limited investment options: Your previous employer’s 401(k) plan may have a restricted selection of investment choices, which will limit how much you can tailor your portfolio to meet your goals.
• Management challenges: It might be difficult to access 401(k) accounts to monitor their performance or rebalance your investments if you are no longer working with the company. It can also be challenging to track down your account if your former employer goes out of business or is absorbed by another company. 
• Hidden fees: Some 401(k) plans have hidden fees that continue to be deducted over time, diminishing your long-term returns.
• Forgetting it’s there: When you don’t roll over a 401(k), there is always the risk that you’ll simply forget it exists and lose a substantial amount of savings. It’s a risk that only grows greater if you have several 401(k) accounts scattered across different employers. 

Why Rolling a 401(k) Over to an IRA Benefits You

Rolling over your 401(k) savings to an IRA is a convenient way to update your retirement savings strategy when you switch jobs. There are several compelling reasons to consider taking this action:

• Convenience: When you have all of your retirement savings in one place instead of held in numerous different accounts, it provides a simplified way to manage these assets  and track your overall progress toward your retirement goals. An IRA also establishes a retirement account that you retain ownership of even if you switch employers, allowing you to consistently contribute to it and realize stronger gains over time.
• Broader investment options: IRAs have a more diverse set of investment options compared to most 401(k) plans, allowing you to invest in options like stocks, bonds, mutual funds, and exchange-traded funds (ETFs) to potentially enhance your returns.
• Greater control: IRAs give you the option to choose your own investment strategy, whether it’s a passive approach with index funds or a more active strategy with individual stocks. This allows you to optimize your portfolio to meet your specific goals and risk tolerance.
• Tax options: You can choose an IRA option that is most tax-advantaged to your current circumstances. Traditional IRAs are tax-deductible to help lower your taxable income, while withdrawals are taxed as ordinary income. Roth IRAs use after-tax contributions and allow for tax- and penalty-free withdrawals during retirement. 
• Potential savings: IRAs may have lower fees compared to some employer-sponsored 401(k) plans.

Rolling Over Your 401(k) with Grey Ledge Advisors

Rolling over your 401(k) to an IRA is a relatively straightforward process. As a first step, you can   contact  Grey Ledge Advisors to assist you in setting up your new account with a new IRA custodian. Then you contact your current 401(k) administrator and request a direct rollover to the new IRA. Since this action transfers funds from one qualified retirement account to another and does not withdraw them, you will not incur any taxes or penalties.

If a direct transfer is not available, you’ll need to do an indirect transfer by requesting a check payable to the new IRA custodian. However, you have only 60 days from receiving the check to deposit it into your IRA to avoid tax penalties.

Working with a financial advisor like Grey Ledge Advisors will not only help you complete the rollover process efficiently, but also provide you with a valuable partner as you pursue your retirement goals. An advisor can also guide you through any unique circumstances, such as what to do when a 401(k) with a previous employer includes company stock.

Grey Ledge Advisors also abides by the fiduciary standard, which means we act in our clients’ best interests. Rather than chasing commissions, we seek out the lowest cost investments that have a higher probability of maximizing our clients’ returns — including options for minimizing IRA fees.

Contact Grey Ledge Advisors using our online form or give us a call at 203-453-9075 to begin a 401(k) rollover process.