Four Options For Your 401(k) When Changing Jobs

FOUR OPTIONS FOR YOUR 401(K) WHEN CHANGING JOBS.

Changing jobs is one of the biggest life decisions you can make and doing so presents an important financial decision: What should you do with your former employer’s 401(k) plan? There are four options you have and understanding the pros and cons of each will be crucial to find the best fit for your situation.

Keep the funds in the old employer’s plan

While this option certainly requires the least amount of effort, not all investors are eligible to leave funds in their former employer’s plan. If your vested 401(k) funds amount to less than $5,000, your former employer has the right to require you to remove the money in some fashion. That $5,000 balance can include all of your contributions, all vested employer contributions, and all investment earnings on those funds. Additionally, your former employer may require that you withdraw your funds once you reach the plan’s average retirement age.

Outside of being low-effort, keeping funds in your former employer’s plan can be beneficial if you need more time to research alternative options, if your new employer’s plan requires employees to reach a certain length of employment to enroll, or if you had access to exceptionally good investment options.

Before deciding to let the funds stay put, make sure there are no additional fees associated with the plan for non-current employees and that your investment options remain the same.

Roll the funds into your new employer’s plan

It has become far more commonplace for 401(k) plans to accept rollovers from past employers without penalty but there are considerations to make before doing so. First, be sure that you are satisfied with your new job and that you will be there for a reasonable amount of time. Should you decide the new position is not for you, it can be a headache transferring funds around. Second, compare the investment options in your new employer’s plan to your old one. Once you have transferred the funds out of the old plan, there is no going back to your previous options.

If you decide to roll over into your new employer’s plan, ensure that the transfer is made directly into the new plan – also known as a trustee-to-trustee transfer. This allows your funds to remain tax deferred and avoids the temporary 20 percent penalty that would be applied if you were to cash-out your retirement savings and then deposit them manually into your new employer’s plan. Now, you would get that 20 percent back once filing your tax return at the end of the year however, there is no need or benefit to putting up the money in this scenario. To avoid that penalty, make sure that rollover checks are written out directly to the new plan or plan administrator, not yourself. It would be wise to contact your company’s plan administrator for details on this process.

The biggest perk of rolling your retirement funds into your new employer’s plan is for simplicity’s sake. Often, investors can lose focus on the performance of their investments with a former employer. As long as your investment options are comparable at your new position, rolling over into one main account is a good practice.

Transfer the funds into an Individual Retirement Account (IRA)

Coming from a former employer’s plan can lead many investors to overlook the option of transferring their funds into an Individual Retirement Account (IRA). An IRA can be set up through nearly any bank or other financial institution and allows a greater range of investment options than the ones chosen by most employer 401(k) plans. While the differences between a 401(k) and an IRA are numerous, the main advantage to your employer’s 401(k) is the matching of contributions up to a certain percentage.

It is important to note that you will not receive a match on the funds you transfer from a previous employer, only on the funds you contribute once enrolled in the new plan. Because of this, there is no real reward on choosing to transfer into your employer’s plan over an IRA unless the plan’s

investment options are more attractive. With an IRA, you are in the driver’s seat to choose which funds, stocks, or bonds you invest in and there will be more effort required as a result. On the other hand, you may encounter some savings depending on what plan fees are associated with your employer’s plan.

Just like rolling over into your new employer’s 401(k), you will want to execute a trustee-to-trustee transfer if choose the IRA option. The same fees will apply if you withdraw funds before transferring to your IRA.

Cash out the funds

Lastly, cashing out your funds from your former employer’s plan is the option that nearly every financial professional would advise against. The same penalties discussed above that apply to an early withdrawal cannot be made up in your tax return as they can with a 401(k) or IRA transfer and will be a pure loss. Despite the losses, 2013 research from Boston Research Technologies found that just over 30 percent of workers changing jobs will elect to cash-out their retirement funds.

The only two instances where cashing out should become an option is if you are over the age of 55 or need the money for an immediate purpose. If you terminate your employment in or after the calendar year in which you turn 55, you will no longer be subject to an early-withdrawal penalty for that employer’s plan. In the case of a former employer’s plan that you left before age 55, those funds will still be subject to this penalty. The potential workaround is if these funds were transferred into a post-55 employer’s plan.

For any 401(k) questions, please don’t hesitate to contact your GuideStream Financial Advisor.

Year-End Financial Checklist

As we near the end of the year, it is time to look back at what has happened and see how it will affect your financial future. Check off these important items so that you can start the new year’s finances with peace of mind.

Review your tax withholdings.
Have you had a major life change (employment change, marriage/divorce, a new child) that affects your income tax? Check to make sure your tax withholdings have been properly adjusted. Having low withholdings can lead to tax penalties, while having too high of withholdings prevents you from accessing your money until your tax return is filed.

Donate to charity as a way to reduce taxes.
You can lower taxable income by 50 or 30 percent with a gift to a public charity or by 30 or 20 percent with a gift to a private foundation. If your gift exceeds these limits, you can roll over the excess deduction for up to five years.

Reduce your estate through gifts. 
You are permitted to give up to $14,000 ($28,000 for married couples) a year per recipient as an untaxed gift. Gifts above this value will consume part of your lifetime gift/estate tax exemption amount ($5,490,000 in 2016). If a gift directly funds education tuition or pays for qualified medical expenses, it will go untaxed no matter what the value.

Check to see when you last rebalanced your portfolio.
Although you don’t need to update your investments every year, many people go far too long without making necessary adjustments as they age. As GuideStream clients, we monitor your account and rebalance your portfolio a minimum of once per year.

If you are retired, make sure you have taken all necessary required minimum distributions (RMDs).
RMDs may be one of the most important items to review when going over your finances at the end of the year. Standard IRAs require these distributions be taken annually after the year you turn 70 ½; standard 401(k)s require them annually after you retire or turn 70 ½ (whichever is earlier). Failure to take an RMD will trigger a 50 percent excise tax on the value of the RMD. At GuideStream, we strive to be proactive in helping our client’s awareness of their RMDs. However, if you ever have questions, please contact us immediately.

Max contributions to an IRA and employer retirement plan for the year.
Both IRAs and 401(k)s have annual contribution limits. If you find you have excess savings and have not reached your annual limit, it may be a good idea to make additional contributions. Similarly, you may also consider making greater monthly contributions to your accounts next year, spreading out the cost of contribution. The deadline for IRA contributions is usually April 15 of the following year, though this may vary; 401(k) deadlines may be restricted to the calendar year, depending on your employer. If you would like to make a contribution, we are always available to help.

Check your flexible savings account (FSA).
The government only permits a $500 annual rollover in an FSA; any excess funds disappear if unused by the end of the year. If you have extra money in your FSA, you may want to schedule necessary medical or dental procedures before the end of the year.

Check your health savings account (HSA).
HSA funds don’t disappear at the end of each year like with an FSA; however, many with few medical needs discover money accumulating in their HSAs much faster than they are using it, which is a good thing.  Consider increasing contributions as this is the only savings option where both contributions and distributions for health related purposes are tax free. 

Consider contributions to a 529 plan to fund your children’s/grandchildren’s education.
529 Plans allow for you to make contributions to a tax-free account that may be used to pay for qualifying secondary education expenses. (Investors should consider investment objectives, risks, charges and expenses associated with 529 plans before using them. Information about 

12 Common Tax Errors to Avoid

Filing taxes can be a tedious process. If you plan to do it yourself, either online or with an old-fashioned pen and paper, it can be all too easy to make mistakes. If you aren’t familiar enough with the tax code to take advantages of available tax breaks, you could lose money. Clerical errors and math mistakes can lead to tax audits, late fees and even jail time for tax fraud. Avoid the following common mistakes to ensure that you get through tax season unscathed. 

1.    Choosing the wrong filing status: Choosing the correct filing status is important because tax brackets, deductions and credits vary for each status. You may fare better filing separately even if you’re married, so make sure to calculate both scenarios before choosing a status. You should also consider filing as Head of Household if you’re single and have a dependent living with you. Your filing status is based on your status as of Dec. 31 of the filing year. 

2.    Not claiming all available deductions and credits: You could end up with a smaller refund or a larger tax liability than necessary if you fail to take advantage of the tax breaks available to you. Do your research and consider getting help from a tax preparer or software to make sure you’re not missing anything in your return.

3.    Not claiming all dependents: You probably won’t forget to claim your children as dependents, but did you know you could claim your parents, too? Anyone you support financially (adult children, elderly parents or other relatives) more than they support themselves, may be claimed as a dependent as long as they meet the requirements. Even if your parents don’t live with you, you may be able to claim them.

4.    Forgetting to claim carryover items: Some tax credits must be taken over the course of several years if they exceed certain thresholds. Common examples include charitable donations, capital losses and business write-offs. If you weren’t able to claim the entire credit in years past, make sure you’re claiming it this year.

5.    Neglecting to calculate the AMT: The Alternative Minimum Tax is a parallel tax code with its own set of rules. Taxpayers are expected to calculate their tax burden two ways, once under the regular tax code and once under the AMT’s rules. Whichever outcome is higher is the tax they owe. Many taxpayers don’t calculate their taxes under the AMT because they assume they aren’t eligible, but the number of people required to file under the AMT is increasing. If you pick the wrong tax code, the IRS could come looking for the remaining balance.

6.    Claiming the wrong credits and deductions: Make sure you actually qualify for the credits and deductions you claim. If the IRS catches on, you could face a tax audit, recalculation of your tax burden, or in extreme cases—jail time for tax evasion.

7.    Not including all sources of income: If you worked at more than one job during the year, you should have a Form W-2 for each job. You should also include applicable Form 1099 for other income sources. Missing forms or leaving out income can lead to tax audits or a delayed refund. If you inadvertently leave something out of your return, you can file a Form 1040X Amended Return.

8.    Math errors: It’s easy to make math mistakes when you’re doing your taxes by hand and flipping back and forth between forms. Double-check your math before filing, because a mistake could lose you money or get you in trouble with the IRS.

9.    Direct deposit mistakes: You can now elect to receive your tax refunds via direct deposit to your checking or saving accounts. This election can help you save money and speed the process along, but it’s also another opportunity for error. If you input the wrong routing number, your return could go to someone else or be sent back to the IRS.

10.    Forgetting to include your social security number: You must include your correct social security number in order to file a return. Failing to do so can hold up your return and subject you to late filing fees. You must also include your spouse’s social security number if you file jointly, as well as the numbers of any dependents you claim.

11.    Forgetting to sign and date your return: Your return is not valid if you don’t sign and date it. Failing to do so could also subject you to late fees and delayed refunds. To remedy this, the IRS will send out a signature card for you to sign. Speed up the process by double-checking that your signatures are present.

12.    Not including your payment: If you owe the IRS money, make sure to include what you owe when you file. If you forget, you may end up owing interest and late fees even though you had the return filed on time.

Remember that past performance may not indicate future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, strategy, or product referenced directly or indirectly in this newsletter will be profitable, equal any corresponding historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. You should not assume that any information contained in this newsletter serves as the receipt of personalized investment advice. If a reader has questions regarding the applicability of any specific issue discussed to their individual situation, they are encouraged to consult with a professional adviser.

This article was written by Advicent Solutions, an entity unrelated to Guidestream Financial, Inc.. The information contained in this article is not intended to be tax, investment, or legal advice, and it may not be relied on for the purpose of avoiding any tax penalties. Guidestream Financial, Inc. does not provide tax or legal advice. You are encouraged to consult with your tax advisor or attorney regarding specific tax issues. © 2014-2017 Advicent Solutions. All rights reserved.

Year-End Financial Checklist

YEAR END FINANCIAL CHECKLIST

As we near the end of the year, it’s time to look back at what’s happened and how it will affect your financial future. Check off these important items so that you can start the new year’s finances with peace of mind.

INCOME TAX
Review your tax withholdings.
Have you had a major life change (employment change, marriage/divorce, a new child) that affects your income tax? Check to make sure your tax withholdings have been properly adjusted. Having low withholdings can lead to tax penalties, while having too high of withholdings prevents you from accessing your money until your tax return is filed.

Estimate your AGI.
Determine your adjusted gross income (AGI) with the help of your tax advisor. Your AGI will help determine your tax bracket, which you’ll need for investment and retirement planning.

Estimate your AMT.
Determine whether you will be subject to the Alternative Minimum Tax (AMT) and if there are ways to mitigate your AMT liability.

INVESTMENTS
Assure that your investment portfolios align with your long-term plan.
If you don’t have a plan or have questions about the alignment, contact your GuideStream Financial advisor. 

Systematically review your portfolios and rebalance when appropriate.
As a client of GuideStream Financial, we handle this step for you. We systematically review each portfolio and periodically rebalance to make any necessary adjustments. We just completed a rebalance in early November. 

RETIREMENT ACCOUNTS
If you are retired, make sure you’ve taken all necessary required minimum distributions (RMDs).
RMDs may be one of the most important items to review when going over your finances at the end of the year. Standard IRAs require these distributions be taken annually after the year you turn 70 ½; standard 401(k)s require them annually after you retire or turn 70 ½ (whichever is earlier). Failure to take an RMD will trigger a 50 percent excise tax on the value of the RMD.

Max contributions to an IRA and employer retirement plan for the year.
Both IRAs and 401(k)s have annual contribution limits. If you find you have excess savings and have not reached your annual limit, it may be a good idea to make additional contributions. Similarly, you may also consider making greater monthly contributions to your accounts next year, spreading out the cost of contribution. The deadline for IRA contributions is usually April 15 of the following year; 401(k) deadlines may be restricted to the calendar year, depending on your employer.

Consider converting a traditional IRA to a Roth IRA.
Did you have a good tax year? It may be an opportune time to convert a portion (or all) of your traditional IRA to a Roth IRA and pay your taxes at a lower rate. It is important to understand, however, that Roth accounts have contribution limits placed on them, so keeping a traditional IRA might be beneficial. Before making any changes, consider seeking the help of a professional   accountant who can help you with the conversion and calculate your new tax liability.

GIVING
Donate to charity.
In additional to the joy received by assisting causes your care about, you can lower taxable income by 50 or 30 percent with a gift to a public charity or by 30 or 20 percent with a gift to a private foundation. If your gift exceeds these limits, you can roll over the excess deduction for up to five years.

Reduce your estate through gifts.
You are permitted to give up to $14,000 ($28,000 for married couples) a year per recipient as an untaxed gift. Gifts above this value will consume part of your lifetime gift/estate tax exemption amount ($5,430,000 in 2015). If a gift directly funds education tuition or pays for qualified medical expenses, it will go untaxed no matter what the value.

FAMILY FUNDING
Check your flexible savings account (FSA).
The government only permits a $500 annual rollover in an FSA; any excess funds disappear if unused by the end of the year. If you have extra money in your FSA, you may want to schedule necessary medical or dental procedures before the end of the year.

Check your health savings account (HSA).
HSA funds don’t disappear at the end of each year like with an FSA; however, many with few medical needs discover money accumulating in their HSAs much faster than they are using it. Consider reducing your contributions to your HSA if your account has reached a comfortable amount and you know of better uses for your money.

Consider contributions to a 529 plan to fund your children’s/grandchildren’s education. 529 Plans allow for you to make contributions to a tax-free account that may be used to pay for qualifying secondary education expenses. (Investors should consider investment objectives, risks, charges and expenses associated with 529 plans before using them. Information about 529 plans is available in their issuers’ official statements.)

Remember that past performance may not indicate future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, strategy, or product referenced directly or indirectly in this newsletter will be profitable, equal any corresponding historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. You should not assume that any information contained in this newsletter serves as the receipt of personalized investment advice. If a reader has questions regarding the applicability of any specific issue discussed to their individual situation, they are encouraged to consult with a professional adviser.

This article was written by Advicent Solutions, an entity unrelated to Guidestream Financial, Inc.. The information contained in this article is not intended to be tax, investment, or legal advice, and it may not be relied on for the purpose of avoiding any tax penalties. Guidestream Financial, Inc. does not provide tax or legal advice. You are encouraged to consult with your tax advisor or attorney regarding specific tax issues. © 2014-2015 Advicent Solutions. All rights reserved.

Worse Than Taxes

Protecting Yourself from Tax Scams
Tax season is perhaps the most widely hated time of the year. It’s annoying and, for many, expensive. But despite its unpopularity, some people are determined to make it even worse: tax scammers.

Wherever there is money, there is someone willing to steal it. Tax season provides thieves with several opportunities to fleece people who are just trying to do their civic duty. Fortunately, being able to recognize the signs of a swindle can offer a lot of protection. Here are some of the common tax scams thieves like to use:

Stolen Refund
The Scam: A thief steals taxpayers’ information, files their tax returns before them and pockets the refunds. When the victims go to file their taxes, the IRS informs them that their taxes have already been filed, causing complications and delays on their real returns.

Defense: This scam is difficult to block because taxpayers don’t know it’s happening until it’s too late (though the IRS has greatly increased its efforts to detect and stop fake returns). Personal information stolen digitally is the thieves’ greatest asset. Be sure to protect your computer from viruses and delete any unwanted emails that request personal information or ask you to update your IRS e-file account.

Opportunistic Preparers
The Scam: A dishonest tax service skims refund money or personal information after preparing clients’ taxes. Refund skimming has become particularly easy to disguise because many tax preparers allow you to pay service fees directly from your refund. While convenient, this process can obscure refund values and make it easier for preparers to charge undisclosed fees. Aggressive scammers will actually falsify your tax information to secure a bigger refund while putting you at risk of tax fraud.

Defense: If you have someone else prepare your taxes, make sure they are trustworthy and reputable. Although many quality services allow you to pay with your refund, it is best to pay fees upfront when using a new tax service. This will reveal the true cost of filing and whether the service is offering competitive rates. Always copy and review your tax return before it’s submitted; you are legally responsible for your return, even if you did not prepare it.

Tax Extortion
The Scam: Rather than intercepting tax returns, some ambitious scammers actually impersonate IRS agents and try to collect additional taxes. After calling an individual and identifying themselves with fake names and fake government ID numbers, the scammers demand extra taxes be paid immediately to a specific bank account or P.O. box. These scams often target recent immigrants who are unfamiliar with U.S. tax procedure.

Defense: If you receive an unexpected call from the IRS, hang up. The IRS never calls anyone without first mailing a letter to resolve the issue. Also, the IRS does not demand immediate payment or require payment in a certain form (many scams use wire-transfers or prepaid debit cards). Scammers may also reveal themselves by using threats, hostile language and follow-up calls from someone claiming to be the police—things the real IRS never does.

For additional information on tax scams, review the IRS consumer alerts webpage at: https://www.irs.gov/uac/Tax-Scams-Consumer-Alerts.

What to Do If Your Tax Refund is Stolen
Despite the best efforts of both taxpayers and the IRS, some tax scams are successful. If you believe you’ve been scammed, it’s important to act quickly to minimize the damage. Although some scams might only delay your return, others could indicate serious identity theft. It may not always be possible to get back money lost in a scam, but protecting your financial accounts can keep things from getting much worse.

If you suspect your identity has been stolen, follow the government’s official instructions found here: https://www.usa.gov/identity-theft.
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Remember that past performance may not indicate future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, strategy, or product referenced directly or indirectly in this newsletter will be profitable, equal any corresponding historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. You should not assume that any information contained in this newsletter serves as the receipt of personalized investment advice. If a reader has questions regarding the applicability of any specific issue discussed to their individual situation, they are encouraged to consult with a professional adviser. 

This article was written by Advicent Solutions, an entity unrelated to Guidestream Financial, Inc.. The information contained in this article is not intended to be tax, investment, or legal advice, and it may not be relied on for the purpose of avoiding any tax penalties. Guidestream Financial, Inc. does not provide tax or legal advice. You are encouraged to consult with your tax advisor or attorney regarding specific tax issues. © 2014 Advicent Solutions. All rights reserved.

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