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The Internal Revenue Service should issue further guidance to clarify the tax treatment of unclaimed 401(k) plan savings that have been transferred to states, the Government Accountability Office advises. And states need to push for greater efforts to find the owners of these funds, according to Phyllis Borzi, a former Labor Department official.
In a January report, GAO states that while the IRS and the Labor Department have issued guidance on transferring retirement savings to states, the IRS "has not clarified certain responsibilities or ensured that the retirement savings that owners claim from states can be rolled over into other tax-deferred retirement accounts."
IRS "has not specified whether 401(k) plan providers should report state transfers to IRS as distributions and withhold federal income taxes," GAO said.
IRS officials, according to the GAO, said the agency has not issued guidance to clarify the issue because of "competing priorities."
As a result, 401(k) plan provider practices vary. "Some providers withhold taxes when transferring savings to states while others do not," GAO said.
"This makes the IRS less likely to collect federal income taxes that may be due if transfers are taxable events," GAO said, adding that the IRS also needs to ensure that individuals who claim 401(k) savings from a state can roll over these savings to other tax-deferred retirement accounts after IRS' 60-day deadline.
IRS allows individuals to roll over savings after 60 days for several reasons, none of which include claiming 401(k) savings from a state, GAO said.
Account owners who are unable to roll over their reclaimed savings "forgo the opportunity to continue investing the funds on a tax-deferred basis," GAO maintains.
Millions of dollars in retirement savings are transferred to states as "unclaimed property, only some of which is later claimed by owners," the GAO explains.
As workers shift jobs and leave behind retirement savings accounts, retirement savings are more likely to be unclaimed. Stating that an exact figure is not known, unclaimed retirement savings in the United States have been estimated to exceed $100 billion, GAO states.
