Welcome back to the Retirement Tax Services Podcast! The Capitalize research team recently released The True Cost of Forgotten 401(k) Accounts. They estimate that there are 24.3 million forgotten 401k accounts in the US.That may be $1.35 trillion in assets, or 20% of the 6.7 trillion total assets in 401ks today.
These accounts are typically dormant because someone has started another job or retired. Obviously, they are significant potential value-adds for clients. Moreover, they illustrate how your diligence and day-to-day consistency are, as well.
Watch for job transitions. They can change things almost as radically as retirements. In fact, make checking for them a part of your onboarding process.
A couple of decades ago, people got a job and stayed there indefinitely. In contrast, today, they move around more within a career. Expect this trend to continue.
If someone is leaving a 401k behind with an employer, document their plan for that account. Similarly, find out all you can about any past employment accounts. Get those specifics, too.
Stay intentional. Even if a client stays with an employer long-term, new record keepers or custodians may enter the picture.
As a result, things sometimes get recorded incorrectly. Likewise, before a 401k gets rolled over between different plans,make sure you have the details documented accurately.
Steven recently had a client whose employer changed record keepers. The balances had been rolled over from 2 separate employers: One contribution had been a traditional tax-deferred, while the rest were Roth balances.
As rollovers and record keepers came and went, the documentation had gotten generic.A source was listed as “401 rollover;” not even “401k.”
Consequently, things got confused.In fact, despite there only being 2 actual types of contributions, 6 different funding sources were listed.
Keep diligent. This is why staying intentional is so important. In other words, you can go back and work with the current record keeper to clear things up. However, the longer it is until you do, the harder the task can be.
So, whenever possible, document the details upfront. There is no better time than when you onboard a client. In consequence, if you need to prove, for example, that certain contributions were after-tax, it will be easier.
This applies to tax planning in general. In all honesty, the best strategies are worthless without accurate records.
Therefore, Form 8606, which concerns nondeductible IRAs,is extremely important. Make sure all contributions get tracked from year to year. In fact, don’t miss taking advantage of this for higher-income clients.
Additionally, Form8915-E remains prevalent because of COVID-19. These disaster-related distributions are likely to impact 2021 and 2022, as well.
Track and document net operating losses (NOLs) for businesses. Meanwhile, if a client uses a portion of their federal estate tax exemption during their lifetime, record it from year to year.
Informed, accurate planning decisions require your own records. Keeping them accurate and up-to-date often avoids IRS issues. Consequently, staying proactive and intentional is a guaranteed value-add.
Visit the National Registry of Unclaimed Retirement Benefits to track down former 401(k) plans that your clients have participated in.
Collect W2s or pay stubs from clients. These documents, in particular, can yield lots of important information. In case someone forgets what retirement accounts they are contributing to, their stubs will reflect it.
Get tax returns from prospects and clients. Do it annually to see what’s really happening in their financial lives. Whether a client is new or established, it’s vital. They actually lose value if you don’t.
Make sure you discuss clients’ employment history. What retirement savings options are (or were) available to them?Especially if you start to work with them later in their career, never assume everything is listed flawlessly. Prevent forgotten 401k accounts.
Follow us on Facebook and LinkedIn. We’re putting out more and more content to help you improve your tax planning. If you’re about to begin, we want to help ensure a solid start.
Steven discusses forgotten 401k accounts further in this edition of the Retirement Tax Services Podcast.
Thank you for listening.
Steven Jarvis:
Hello everyone! Welcome to the next episode of the Retirement Tax Services Podcast: Financial Professionals Edition. I am your host, Steven Jarvis, CPA. And in this show, I teach financial advisors how to deliver massive value to their clients through tax planning. On today’s episode, our topic is really going to reinforce a theme that comes up pretty often on this podcast, which is that ‘complexity does not necessarily equal value’. It can be easy to get distracted by these really flashy or complex situations. That’s what we try to look for as our opportunities to deliver value to our clients. And while those can certainly be interesting and exciting, usually where we can deliver the most value to the most clients is by consistently applying what may seem to us as simple principles.
So, what we’re going to talk about today are 401(k) accounts. I know really groundbreaking stuff here, but there was a recent article about some research done by a group called Capitalized Research that made this topic come top of mind for me.
SJ:
So, what this research found is that there is over $1 trillion [trillion with a T] in assets and what they’re calling forgotten 401(k) accounts. And the way they define this is as 401(k) accounts that have been left behind when someone transitions to new work or retires. So, what they found that there’s over 24 million accounts that taxpayers have left behind without actively doing anything with. In their research they certainly acknowledged that some of this is just a time-lag that at some point, a lot of these accounts probably will have something intentionally done with them, but here’s this huge pool of accounts out there that really presents an opportunity for us and our clients. Not that those accounts are going to just mysteriously disappear if you’re not doing something with them, but we want to make sure we’re being intentional with every aspect of our, certainly our financial lives and especially when it comes to tax planning. So that we really know what our diversification looks like. Both from an asset allocation and asset location standpoint are.
Now, like I said, many of these accounts, the owners of the accounts are probably aware of. But if you do end up in a situation where you have a client who isn’t sure if they had a 401(k) plan with a former employer and that they certainly didn’t do anything with it when they left, if they had one, there are definitely ways you can go about tracking these 401(k) accounts down. You can contact or have your client contact the former employer; you can contact the record keeper. There’s a national registry of unclaimed retirement benefits that I will post a link to in the show notes that you can also use to try to track down former 401(k) plans that your clients have participated in.
SJ:
So, this really leads us to – job transition should be a life event that you are watching out for, as you talk to your clients. Now that may have already been on your list of things, you’re discussing with them. But especially given what we see for many career paths now, and in the last several years – last decade or two; compared to what our baby boomer clients have done in the past or other previous generations that would go to work and potentially stay at the same employer for their entire career. We have more and more people who shift from job to job on a more regular basis. So, this is going to be a more common theme, now in going forward. And so, on that checklist of things you’re looking for, as you talk to clients about life events, like changing jobs, we need to make sure that we’re talking about what the plan for their 401(k) account is. So that we’re making sure we’re being intentional.
Maybe ultimately the 401(k) account gets left, where it was – it tends to be easier to manage things all in one place. But as long as everyone is aware of what’s there and is being intentional about it. I’m not suggesting that there’s one place that this all has to be, in addition to just making sure whether or not these 401(k) accounts are being intentionally tracked and used by your clients. Another thing to watch out for is that as 401(k) accounts get rolled over between different plans or as 401(k) plans change record keepers or custodians, which can happen at times even if one of your clients doesn’t leave their employer. You need to make sure that you are reviewing and know for certain that the qualification of those funds is getting recorded correctly with the new record keeper or the new custodian, wherever the funds are going.
I was just recently looking at a 401(k) account statement for a client who had rolled balances over from two different employers. And then their current employer had gone through a record-keeper change, and this client had made one contribution as a traditional 401(k) contribution – tax deferred. The rest of their contributions had all been Roth, and so even though they only had two types of contributions in their account, they had six different funding sources listed because as these rollovers had happened and as these record keeper changes had happened, things had just kind of gotten generically labeled. To the point where one of the sources just said 401 rollover, not even 401(k). And so it’s really important and probably more effective to do this at the time of the event to review and make sure that all of those things are being reported correctly. So when it comes time to start withdrawing those funds, or when it comes time to make a plan and understand what we can use those funds for, we have accurate information.
Now, of course, we can go back and work with the record keeper to correct that reporting issue. But the more time we let pass the harder it’s going to be to make sure that gets done effectively and to make sure we have proof, that those were after tax contributions, instead of pre-tax contributions. That really is an important topic to remember, an important concept to remember for a lot of tax planning opportunities. That we need to make sure that things are being reported correctly because our best intentions don’t really matter to the IRS if things don’t get reported correctly. So, in addition to what we’re talking about today with 401(k) plans and making sure that the types of contributions that we’re making are recorded correctly, not just from the onset, but as rollovers happen or as record-keeper changes happen. We also need to keep quite a few other tax planning opportunities in mind under this focus of making sure things get reported correctly.
One place that this definitely can come up and cause problems is with form 8606 and making sure that those contributions get tracked, and we have record of them from year to year so that we are taking full advantage of that opportunity for our higher income clients. Form 8915-e our disaster distributions that were more prevalent this year because of COVID-19, and it will continue to have an impact for 2021 and 2022. Making sure for our business clients that we’re keeping track of net operating losses or NOLs. And making sure that if we have clients who are using a portion of their federal estate tax exemption during their lifetime, that that gets tracked from year to year, so that as we continue to make planning decisions, we have all of the relevant information to use, and we’re making really accurate and specific recommendations for our clients.
Of course, we can always go back and try to correct these things, but we’re going to be better off, our clients are going to be better off. We’re going to deliver more value if we are proactively and intentionally making sure that accurate records are being kept and things are accurately getting reported to the IRS.
SJ:
So, let’s have that take us right into action items. So of course, as we’re talking about making sure things get reported correctly, we’re going to reinforce that we should be getting tax returns every year for our clients. To make sure that any tax planning recommendations we make get reported to the IRS correctly.
Since we talked about 401(k)s today and especially forgotten 401(k)s, I would also add that you should be getting W2’s or pay stubs for your clients as well, because there’s also a lot of information we can learn from those documents in particular, as it relates to what types of retirement accounts our clients are contributing to, during their working years.
The next action item is to make sure that you are talking to your clients about their employment history and what retirement savings options were available to them at their current and previous places of employment. Maybe this is just on your list of things you’re asking clients about during client meetings, making sure identifying those life events, but especially if you are starting to work with a client later in their career, don’t just assume that everything has been done correctly before. Make sure you take time to understand what their job history has looked like. And whether there were stops along the way that might’ve had retirement accounts and make sure you understand how those retirement accounts were handled as they made their different job transitions.
The last action item I recommend today is that you follow Retirement Tax Services on Facebook and LinkedIn for more great content that we are putting out, to help you, our financial advisor friends deliver more value to your clients through tax planning. Until next time, good luck out there. And remember to tip your servers, not the IRS!
