According to a recent study, about 20% of Americans’ massive investments in 401(k) accounts belong to ex-employees. Enough of these accounts are neglected or forgotten that the government has established a National Registry of Unclaimed Retirement Benefits (unclaimedretirementbenefits.com) to assist former employees in reclaiming their accounts, which average about $55,000 each. Those accounts, properly integrated into individual retirement plans, would enhance post-retirement lifestyles.
Historically, smaller 401(k) accounts (generally under $5,000) have been distributed to ex-employees via mailing a check to their last known address. These distributions are usually spent, meaning that they are also taxable income for the year of distribution. Deferring those funds into a qualified retirement account is far more additive to the account owner’s future.
In our day jobs, and on the radio, we have always advocated taking control of your 401(k) accounts upon severing ties with an employer. Rather than cashing out, these funds can be rolled, tax-free, into Individual Retirement Accounts (IRAs), or even into 401(k) Plans with the new employer, if allowed. We prefer taking control by opening a self-directed IRA. Forgotten and ignored accounts can be declared dormant, and may become frozen.
Forgotten money is not the only opportunity cost for many savers. For over a decade, savers were punished with near-zero interest rates on their new or renewed Certificates of Deposit (CDs). Longer-maturity CDs issued in those years have time remaining to maturity, and virtually no interest is being paid until renewal.
Experienced savers know that CDs cashed in prior to maturity have a penalty feature, generally 3 months of interest. What is not so intuitive is that these near-zero CD penalties are hardly worth considering. For instance, on a 5-year, $10,000, 1% yield CD, three months of interest (the penalty) amounts to a whopping $25. Annual interest is a mere $100. Today’s $10,000 CDs earn closer to 4.6%, meaning three months of interest would pay $115. That means the break-even point is a mere 3 weeks. You would earn more interest every month than in a whole year at the old rate. The increase is “found money.”
A saver desiring to earn even higher interest rates today might consider a shorter-duration CD. Our recent inverted interest rate curve is offering rates up to about 5% for holding periods of 2 or 3 years. Each investor has the option to choose a rate, based on the actual time to maturity.
Performing a thorough financial assessment for yourself will enhance your future financial comfort. Take control. We can help.
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