The Rules about 401K

Beware of over-funding your 401K when changing jobs.

June 14, 2017 by Reynolds & Rowella Leave a Comment

Every tax season, I have one or two clients who changed jobs during the year and have over-funded their 401K. It is very important when starting a new job to let your new employer know how much you have already contributed to your 401K at your old employer. If you are under 50, for 2017, the maximum amount you can contribute to a 401K is $18,000 IN TOTAL. If you are 50 or over, you can do a catch-up contribution of $6,000 for a total annual funding of $24,000.

Over-funding of your 401K can result in double taxation of your income. You will pay tax on the over-funding in the year of the mistake, as well as when the funds are withdrawn. There is a remedy to the over-funding situation but it needs to be done usually by April 1. You must notify either your old or new employer of the error and ask them to correct it.

The best thing to do when you change jobs is to call your accountant. We are always happy to help you with your new W-4 and to take a look at your final paystub from your old employer for items like 401K and HSAs (another type of contribution with maximum annual limits).

Couples and money: Five suggestions for financial health

May 18, 2017 by Reynolds & Rowella Leave a Comment

Do you have a financial plan that works for both you and your spouse? Here are suggestions that can help.

1. Organize your finances.

Get a handle on your income and spending, by both of you individually and as a couple. By reviewing the overall picture of how you spend money, you can focus on potential problem areas.

2. Set goals.

How much will you accumulate in bank accounts and investments over the next three years? Five years? Ten years? Have you anticipated future expenses? Say, for example, you’re dreaming of a vacation in Europe for your anniversary. You’ll want to start saving now so you won’t need to finance the trip with credit cards.

3. Build an emergency fund.

How much is enough for emergencies? As a general rule, set aside three to six months of your combined gross income in easily accessible accounts, such as savings or money market accounts.

4. Save for retirement.

Participate in your employer’s retirement plan and contribute at least as much as the amount your employer will match. The earlier you start saving, the more you’ll accumulate. It’s that simple.

5. Formalize an estate plan.

Have an attorney draft a will and set up a financial power of attorney so your assets are distributed according to your wishes in the event of death or incapacity.

For advice and guidance specific to your situation, contact us at consulting@reynoldsrowella.com we’re here to help.

Don’t be forced out of a 401(k) from your former job

July 20, 2016 by Reynolds & Rowella Leave a Comment

When you change jobs and abandon vested amounts in your 401(k), your former employer has to follow IRS rules and plan provisions for dealing with your account balance. Pursuant to these guidelines, the 401(k) plan may have a “force-out” provision. That means when your vested balance is less than $5,000, you can be forced to take your money out of the plan.

Your former employer is required to give you advance notice of this rule so you can decide what to do with the money. Your choices are to cash out your account and receive a check, or roll your account balance into an IRA or your new employer’s plan.

What happens if you fail to respond to the notice? If your vested balance is more than $1,000, your former employer must transfer the money to an IRA. For balances under $1,000, you will either get a check or your former employer will open an IRA on your behalf.

Neither outcome is optimal, according to a report by the U.S. Government Accountability Office. If you receive the money, you’ll owe federal income tax. When the balance is transferred to an IRA, account fees may outpace investment returns and your balance will be eroded over time.