Clarification on what to do with 401(k) after leaving a company
Q: In a recent column, you encouraged readers to roll over retirement accounts into IRAs when they terminate employment. I have a 401(k) account from a former employer that is still active. Should I roll over that account into a different IRA account?
A: I want to make a distinction between active 401(k) accounts and other retirement accounts not regulated under the Employee Retirement Income Security Act of 1974, or ERISA.
When an individual leaves his or her job, the regulations are different depending on the assets in the account. When a 401(k) account is valued at $5,000 or more, the employer must maintain the account for the employee in the same form, unless otherwise instructed.
If, when you left your job, your account was valued at $5,000 or more, you have the choice to retain your 401(k) account or roll over the account to an IRA of your choosing. That choice should be based on the annual costs associated with the 401(k), the past performance of the account and the flexibility of the account.
Many 401(k) accounts are well-run, have low costs and are flexible. If that is the case with your 401(k), then there is no reason to roll it over into an IRA.
For example, the federal government offers an attractive defined-contribution plan called the Thrift Savings Plan, which has low costs, excellent long-term performance and flexibility. If an individual had such an account worth at least $5,000 when they terminated employment, I would encourage them to retain it rather than rolling it over.
If you are satisfied with the performance of your 401(k), then no action is required on your part. Active 401(k)s are regulated under ERISA and, based on information provided to me by federal staff, there is no reason to believe that any account valued at $5,000 or more will become dormant and be turned over to a state unclaimed asset database.
Naturally, after you reach age 72, you must take required minimum distributions to avoid tax penalties and possible dormancy.
In my column, I should have been more specific. I was referring to defined-contribution accounts that were valued at less than $5,000 when an individual left employment.
In that situation, the employer is not required to retain the account in same form. Generally, if the account has a value of between $1,000 and $5,000, the employer rolls over the account into an IRA. If the account is valued at less than $1,000, the employer generally establishes a savings account or writes a check to the employee. These accounts are not governed by ERISA.
If a non-ERISA retirement account remains inactive for a specific “dormancy period,” which varies among states, the account may be turned over to a state unclaimed asset database.
I do recommend that if you have funds in a retirement account that is valued at less than $5,000 when you terminate employment, select an IRA of your choice that has low annual costs, good performance history and flexibility.
Q: I used the database you recommended in your column about unclaimed assets, specifically missingmoney. com, and requested information from Maryland. I was asked to pay a nominal fee to access the website. Your column indicated access to state databases was free. I declined access because of the fee.
A: Based on your information, I contacted the National Association of Unclaimed Property Administrators, which had indicated that access should be free, to find out why a fee was requested. I was told by a representative that no fee should be charged by any state database. I referred the reader to https://interactive. marylandtaxes.gov/Individuals/Unclaim/ default.aspx, which allowed the reader free access to Maryland’s unclaimed asset database. Direct access to any state database of unclaimed assets is free.