You’ve been saving to your workplace retirement account for your entire career. Are you about to shatter that retirement nest egg when you punch the clock for the very last time? Joe Anderson, CFP® and Big Al Clopine, CPA, explain your options for accessing your retirement plan savings when you leave your employer while avoiding the common mistakes that could cost you thousands if not tens of thousands of dollars.
Accessing Your Savings at Retirement
- Account Types: Defined Contribution vs. Defined Benefit
- Post-Retirement Options: Leave It, Roll It, Withdraw It, Convert It
- Passing Wealth On to the Next Generation
Important Points:
- 00:00 – Intro
- 00:59 – 2023 Total US assets in workplace retirement plans
- 01:47 – Accessing Your Savings at Retirement
- 02:13 – Defined Contribution Plan (401(k), 403(b), 457, TSP, IRA) vs. Defined Benefit Plan (pensions)
- 03:38 – Defined Benefit Pension Characteristics
- 04:42 – Post-Retirement Options for Defined Contribution Plans: Leave It, Roll It, Withdraw It, Convert It
- 06:14 – Retirement Readiness Guide – free download
- 07:00 – True/false: You can roll over your 401(k) to an IRA only if you leave your current employer or your employer discontinues your 401(k) plan
- 07:33 – Pros and Cons of Leaving Your 401(k) With Your Previous Employer
- 09:13 – Pros and Cons of Rolling Your 401(k) to an IRA
- 09:42 – Withdrawing Your 401(k) or IRA Money – taxable as ordinary income
- 10:32 – Required Minimum Distributions Explained
- 12:43 – Retirement Readiness Guide – free download
- 13:21 – True/false: When you withdraw from a Roth IRA you won’t owe any tax.
- 14:00 – Pros and Cons of Roth Conversions
- 16:04 – The Roth Conversion Strategy Explained: Filling the Tax Bracket
- 17:39 – Tax Diversification: Benefits of Having Money in Tax-Deferred, Taxable, and Tax-Free Accounts
- 19:22 – Passing Retirement Savings On to the Next Generation
- 19:56 – I have multiple 401(k) accounts from several past employers. Is there any advantage to combining them while I am still working? Kurt, Mira Mesa, CA
- 21:03 – If I die before I retire, what happens to my 401(k)? Joan, Tacoma, WA
- 22:07 – Pure Takeaway
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Transcript:
Joe: Here’s a question for you. What are you going to do with that workplace retirement account when you punch that clock for the very last time? Stick around and find out, folks. There’s more mistakes than you think when it comes to those workplace retirement accounts, and we’re going to help you solve them.
Welcome to the show. The show’s called Your Money, Your Wealth®. Joe Anderson here. I’m a CERTIFIED FINANCIAL PLANNER™, President of Pure Financial Advisors, and I’m with Big Al Clopine. He’s sitting right over there. Hello, Big Al.
Al: How you doing? Good morning.
Joe: Good morning. Are you gonna punch that clock for the very fir- or very last time?
Al: I hope so.
Joe: This is it, huh?
Al: Getting there.
Joe: When it comes to retirement accounts, there is a lot of money in retirement accounts, and if you make some simple mistakes that a lot of you do, it could cost you thousands, if not tens of thousands. Let’s put that money back into your pocket. That’s today’s financial focus.
All right, look at this. $35,000,000,000,000, almost $36,000,000,000,000- This is as of 2023. $36,000,000,000,000 in deferred retirement accounts. The biggest ones here are your IRAs. 35% of that is in your individual retirement accounts, and of course you got 401(k). You got government pension plans, annuity plans and things like that. But $36,000,000,000,000, Al.
Al: It’s a lot of money and that’s how we’re gonna retire.
Joe: All of this money also is taxable when it comes out. There’s penalties if you do it wrong, so you wanna make sure that you know the rules and what’s ahead of you. Let’s bring in Big Al to figure it out.
Al: Okay. Today we’re going to talk about your retirement accounts and how to take money from them accessing those accounts. So first of all, we’ll talk about what type of accounts because there’s different rules for each type of account. Secondly, we’re going to talk about options. There’s things you can do with this account, that account and so forth. You need to know those. And then finally, Passing it on to the next generation. And I know from experience, ’cause we talked, a lot of you, most of you want the money for yourself. You’ve earned it, it’s for your retirement. But to the extent there’s extra, you wanna figure out how to pass it to the heirs, tax efficiently.
Account Types: Defined Contribution vs. Defined Benefit
Joe: Let’s take a look at what type of accounts that we’re dealing with here. So first of all, there’s two different types of retirement accounts to be thinking of. We have defined contribution plans. This is your standard retirement account that most of you are familiar with. 401(k), 457, IRAs. Defined contribution, the reason why it’s called defined contribution is the contribution is defined. You could put so many dollars into these plans. On the flip side, we have defined benefit plans. These are the old standard pensions. Why they’re called defined benefit plans is because then the benefit is defined for you. If I worked for my organization for so many years, they’ll take a look at my high 3 years of wages, how many years that I worked for the overall company, and they spit out a calculation. They’ll say, Joe, you’re going to receive X amount of dollars for the rest of your life. Here, the contribution is defined. Here, the benefit is defined. So, there’s different rules and regs when it comes to each of these different plans.
Al: Well, there are, Joe. And nowadays, you see mostly defined contribution plans. The defined benefit plans, which were kind of old school plans, you still see them at larger companies and mid-sized companies, but they’re pretty expensive for the employer. So, they kind of, they kind of switched this around several years ago, which is, let’s get the employees involved saving from their paycheck, we’ll contribute also. So you see a lot more of the defined contribution plans. All right, but let’s start with defined benefit plans. Well, first of all, it’s your employer that manages the plan, not you. Right? Money goes in, in your benefit. And then promises a guaranteed income stream for life or potentially a lump sum, depending upon what you choose. It’s almost always taxable when you withdraw the money, right, at ordinary income rates. And if you withdraw it before 59 and a half, generally, you’ll pay a 10% penalty.
Joe: Yeah, when those of you that have defined benefit plans, this is probably the largest decision that a lot of you will have to make, do I want to take the lump sum and roll it into my IRA? Or do I want to take that monthly annuity payment so I have a guaranteed income for the rest of my life? So you want to make sure that you do the math accordingly, and also what’s your risk tolerance. Sometimes it’s, some people feel a lot more comfortable with a larger floor of income. Some people want to take the risk and move that money into their IRA so they can control the overall investments and their distributions. And, ultimately the tax on those dollars. So when you’re looking at retirement accounts such as your defined contribution plans, IRAs, 401(k)s, things like that, but let’s talk about your employer-sponsored plan for a second.
Post-Retirement Options
401(k) plans, few things that you could do. You can just leave it in the plan. So I’m retiring. I could leave that money in the plan. I could take the money out of the plan when I choose to, if I’m over 59 and a half or 55, or I could roll it into an IRA. So those are two different options. I can leave it. Or I could roll it. Or I could take it all out. A lot of people make this mistake because it’s like, well, I’m retired. I have this lump sum or I got to pay a lot of bills or I want to pay off my mortgage. They take big withdrawals and guess what? They don’t understand the taxation of it. And so they have a huge tax bill or they could potentially convert it into an IRA. So there’s a lot of steps or a lot of options out that people have in regards to the retirement accounts.
Al: Well, there are, Joe, and I do think people get confused, right? On rolling versus withdrawing. They sound kind of similar, but they’re completely different. When you roll it, the money rolls to an IRA. There’s no current taxation. It just goes into an IRA. Right? Now you have a little bit more control of it because you have more investment choices. It’s still your money. It’s not taxed until you withdraw it. If you withdraw it and get a check, guess what? You’re paying taxes on whatever you withdraw. Don’t make that mistake. If you do make the mistake, you do have about 60 days to correct it. But just be aware of that.
Joe: Hey, we got to take a quick break, but don’t forget to go to YourMoneyYourWealth.com. Click on that special offer this week. It’s our Retirement Readiness Guide. Are you ready for retirement? Well, we can get you ready. YourMoneyYourWealth.com. Click on the special offer. That’s our gift to you. Download the guide and figure it out. We got to take a break. We’ll be right back.
Post-Retirement Options: Leave It
Hey, welcome back to the show, folks. The show’s called Your Money, Your Wealth®. Big Al is over there. I’m Joe Anderson. What we’re doing today is helping you access your workplace retirement accounts. You punched that clock for the very last time. You have this nest egg. How do you go about taking those dollars out to create the retirement income that you need? We’ll get in the weeds in a second, but let’s see how you did on that true/false question.
Al: You can roll over your 401(k) to an IRA only if you leave your current employer or your employer discontinues your 401(k) plan. True or false? Well, it is true. Those two statements are true. But you also in some cases you can an in-service withdrawal. Most plans allow it at 59 and a half. Some plans Joe, are plan specific and you can do more than that.
Joe: Check your plan doc. There’s all sorts of options. But I think on a high level, yes, you need to be separated from service or 59 and a half to get money from a 401(k) plan without penalties. All right, let’s talk about leaving that money in your retirement account, pros and cons, Al. Should you leave it or should you roll it?
Al: It depends. So here’s the pros and cons. So first of all, it’s easy, right? There’s nothing you have to do. Everything’s already set up. Just put it on autopilot. The only thing that changes is you’re not adding additional money into it, nor is your employer. But it can still grow, still has the same investments. That’s a very easy choice. In some cases, if you’re part of a large company, a large 401(k), they may have negotiated lower fees, so that can be an advantage. Certainly, it’s tax-deferred until you withdraw it, although that’s the same as if you roll it to an IRA. Same, same. You may get ERISA fiduciary protection, right? Which basically means divorce, bankruptcy, right? You may have additional protections there in the 401(k) versus an IRA, depends upon the state. And then the last thing can be pretty advantageous if you’re retiring at 55 or later. But earlier than 59 and a half, if you retire or leave your job and you’re 55 years of age, you can actually access those funds as long as they’re still in the 401(k) without the 10% penalty. You will pay taxes, of course, but you won’t pay the penalty.
Joe: But then this is all the other stuff, right? You don’t want to have multiple accounts as you age because it’s very difficult to control the risk. We’ve seen accounts or we’ve seen individuals that have like 8 or 9 different retirement accounts. It probably makes sense to consolidate that, right? Fund choices today, the cost are really low. So sometimes the cost in a smaller plan could be higher. But I think consolidation for most of you is probably the best bet.
Post-Retirement Options: Roll It
Al: Yeah, I think so too, Joe. And then when you think about rolling to an IRA, I do like the fact that all of your accounts are in one place, much easier to manage. You know, downsides is you’ve got to make your investments. There’s more choices. It could be more confusing. Some of the investments out there are high commission type products. So just be careful. Little bit easier to do Roth conversions in an IRA. But I think, Joe, probably in many cases, people should be at least considering rolling to an IRA just ’cause of simplicity.
Joe: Couple rules when it comes to retirement accounts, right? I think most people know that you can’t necessarily take money outta your retirement account prior to 59 and a half, there’s a 10% penalty. Every dollar that comes out of a 401(k) plan or an IRA plan that went in pre-tax is going to come out 100% taxable as ordinary income. So think of this too, most people believe that they’ll be in a lower tax bracket in retirement and I believe that to be true for most people. However, for those of you that have saved a lot of money in a retirement account or that you’re trying to duplicate your paycheck from your retirement funds, if everything is coming out of a 401(k) plan, just know it’s going to be taxed just like your paycheck. So if I’m trying to replicate my paycheck, just know that, hey, my taxable income could be the same if every dollar comes out of that 401(k) or IRA. Alright, but your RMD is another big issue for some of you that don’t like to spend money. That money keeps accumulating in the overall retirement account, and then at a certain age, you’re forced to pull that out. And why you’re forced to pull it out, it’s because the IRS wants those dollars to get recycled so they can tax it. So the RMDs is another issue Al, for a lot of individuals.
Al: It is. And let’s talk about RMDs. So they were 70 and a half at one point, then 72. We’re currently actually 73 as long as you turn 72 after December 31st of 2022. And then we’re going to be 75 here pretty soon, but 73 right now is the required minimum distribution age. There’s charts that tell you how much to withdraw. With each age, you get older and older and older. It’s a higher percentage. And what we see with people that have saved a lot of money in these accounts, They end up pulling out more money than they actually need. They’re paying taxes on money they don’t really need. And in many, in some cases, it’s pushing up to a pretty high tax bracket.
Joe: What accounts are subject to RMDs? Just about every retirement account besides a Roth IRA. The Roth IRA is subject to an RMD when it’s a beneficiary IRA, when you inherit that Roth IRA. So, traditional IRA, SEP, Simples, 401(k)s, 403(b)s, 457s, TSPs, profit sharing plans, other defined contribution plans- the only account that you’re contributing into today that you do not have to take an RMD as you’re alive is the Roth. The Roth will still continue to compound tax-free, but that’s an IRA. If you have a Roth 401(k), potentially you will have a RMD in the Roth 401(k), but they’re trying to change that rule as well.
Al: They are. That’s kind of in process and something else to realize when it comes to required minimum distributions, if you have a whole bunch of IRAs, no problem. You just do one RMD from one account. That’s cool. If you’ve got 6 different 401(k)s, or 403(b)s or whatever it may be, a combination, you’ve gotta do 6 different RMDs, one from each account. It’s another reason why people tend to consolidate and move it to an IRA.
Joe: All right, we got to take another break, but go to YourMoneyYourWealth.com. Click on that special offer this week, folks, our Retirement Readiness Guide. Are you ready for retirement? Figure it out. YourMoneyYourWealth.com. Click on the special offer.
When we get back, we’re going to talk about Roth conversions. You don’t want to miss that. We’ll be right back.
Hey, welcome back shows called Your Money, Your Wealth®. Joe Anderson. I’m a CERTIFIED FINANCIAL PLANNER™, Alan Clopine, and he’s a CPA. We’re talking about your 401(k) plans or your workplace retirement accounts and what do you do with them once you retire. Let’s see how you did on the true/false question.
Al: When you withdraw from a Roth IRA you won’t owe any tax. Well, I would say that’s generally true, because you paid the tax when you converted, or you used after-tax money when you do a contribution. You pull the money out, it’s, it’s tax-free. But you do have to be aware of a few things, like, for example, when you do a conversion, and you’re under 59 and a half, you gotta wait 5 years. You always have to wait 5 years when it’s any kind of account in terms of earnings and growth. So just be aware, it’s not always tax-free, but you gotta be able to follow the rules.
Joe: Let’s talk about Roths, because I think Roths are a really good, added weapon, I guess, to your overall retirement strategy. Conversions to a Roth, right, so we talked about your IRA or your 401(k). Do you keep it in the plan, hold it, stop, just keep it there? That’s fine, or you can roll it into an IRA, or cash it out and pay all the tax, or convert. So pay the taxes up front when you do a Roth conversion. Why would you want to do that? Is that if you believe tax rates are going to go up, it might make sense to pay some tax at a lower rate so all of those dollars will grow 100% tax-free. So you’re taking the uncertainty of taxes off the table. Second, it’s going to give you a little bit more flexibility in regards to your retirement income strategy. So if everything is piled up in your retirement account, every dollar that comes out of that plan, as I said before, is going to be taxed at ordinary income rates. If I have money that I can pull from a Roth, it’s going to be tax-free, so I can start looking at diversifying my taxes in such a way. So conversions, also tax-free to the heirs. So maybe my kids are very successful. I might be in a lower tax bracket than my children. I might want to convert as I age. And then if they inherit those dollars, they will never, ever pay tax on them. So really good reasons to convert. Couple reasons not to, is that you have to take a look at your tax bracket, right? You don’t wanna necessarily pay more tax than you otherwise would have. Or you wanna look at IRMAA, you wanna look at Medicare premiums, you wanna look at credits potentially, if you’re on the Affordable Care Act. So there’s some nuances to this as well.
Al: Yeah, you don’t do it blindly, right? And, and sometimes when you do a Roth conversion, where your Social Security was tax-free, now all of a sudden, it’s taxable because you have more income. So there’s some calculations you have to run. But we are encouraging virtually everyone watching this program that has a retirement account, at least consider a Roth. It makes lot of sense in a lot of cases.
Joe: Here, look at it like this, so we’re approaching tax season. And so you want to figure out what tax bracket that you’re in. So Roth conversion strategy. This is a real simple one is that before your conversion, you look all right, well, my income that filled up the 10% tax bracket and then also filled up the 12% tax bracket. Oh, and I’m in the 22%. But I still have this room in the 22% tax bracket. Well, it might make sense to fill up that 22% tax bracket with more income. And how would you do that? Well, you would do a Roth conversion, take money from your existing retirement account. Transfer those dollars into a Roth IRA. You will pay tax on those dollars, but you’re going to pay it at that 22% rate. Then all of those dollars will grow 100% tax-free. Remember, the tax law is subject to change. So the 10% tax bracket is going to stay the same, but this 12% is going to turn to 15%. This 22% percent is going to turn to 25%. This 24% turns to 28%. So in a lot of cases, you just have tax arbitrage right here that, Hey, I know my rate will be at 25% might make sense to pay at 22%.
Al: It might. In fact, nowadays, that 24% bracket extends a long way. So this is actually the next couple of 3 years. It’s a great time to consider conversions. Now, of course, if you’re in the highest tax bracket and you’re going to be a much lower bracket in retirement, then it doesn’t necessarily apply to you. But just take a look at the overall picture, whether this makes sense.
Joe: Yeah, think of it like this. Start drawing this out for yourself. You have tax-deferred accounts. So this is what we’ve been talking about, 401(k)s, IRAs, 403(b)s, TSP, pre-tax, tax-deferred. When you pull the money out, right, that’s when you’re subject to tax. This is where you have the RMDs. This is where the heirs will pay tax, right? You have your taxable account. So this is your brokerage account. So these are growing tax-deferred. You’re not paying any tax on that growth until you take the dollars out. Same here, tax-free dollars will grow tax-deferred in regards to the Roth IRA. You don’t pay any tax on that growth until you pull the money out. Guess what? I don’t pay tax on that either. The two major differences here is that this is after-tax coming in. So if I want to take money from my retirement account and move it into my Roth, I pay tax. There’s no way around the tax. You got a tax benefit. You’re going to have to pay that tax benefit back. So the tax benefit is really not a benefit. It’s a loan, right? So ideally, it’s like I’ll be in a lower tax bracket in retirement.
So I get a tax benefit today so I can get another potential lower tax when I pull the money out. That’s true for most, but most people that watch the shows might be the opposite because you’ve done a really good job saving here. So it might make sense to start moving dollars up here. Anyone can do a Roth conversion at any age, at any income, you just wanna know what that tax liability is.
Passing Retirement Accounts to the Next Generation
Al: Yeah, you do need to compute that. And a lot of people think, oh, I have to be working to do a Roth conversion. You can do a Roth conversion if you’re working or retired. Right. Joe, let’s talk real quickly about beneficiaries. Probably the most important thing is the beneficiary statement is what controls where the assets go to, not your will or trust. Make sure you’ve got your beneficiary statements up to date. Second most important thing I would say is, when a, a person inherits an IRA that’s, that’s not their spouse, then the money has to be distributed within 10 years. That’s a relatively new rule. No stretch IRA or limited stretch IRA these days. Roth as well. Roth has to be distributed in 10 years, but if the Roth account has been held for at least 5, it’s all tax-free.
Joe: All right, let’s switch gears. Let’s go to our viewer questions.
Al: “I have multiple 401(k) accounts from several past employers. Is there any advantage to combining them while I am still working?” This is Kurt from La Jolla. Whether you’re working or not, it’s probably a good idea, right? Just because it’s more simple to have all assets in a single plan instead of multiple plans with different investments and you’re trying to manage all this. But I don’t think it really matters when you do it.
Joe: No, it doesn’t matter. Just look at the ease of managing is the only thing is why you would want to combine them. Because if you’re rebalancing, let’s say you have 60% of your portfolio in stocks, 40% in bonds, if everything is in one account, that rebalance is relatively easy. What I mean by that is let’s say the market makes a run up instead of 60% stocks, you have 70% stocks. Well, you want to have that balance of 60%. So you have to sell 10% to get it back to 60%. If you do that with multiple accounts, it’s just kind of a pain. So getting things consolidated can help manage the overall account.
Al: This is from Joan in Tacoma. “If I die before I retire, what happens to my 401(k)?” Well, it goes to the beneficiary. So that’s why you want to make sure you look at your beneficiary statements periodically to make sure they’re up to date. If you don’t, a lot of times you’ll have a beneficiary that’s deceased or maybe one you don’t even like anymore, right? So make sure, because if you update your will and trust, it’s not going to affect your beneficiary statements on your 401(k), 403(b), IRA, Roth, whatever.
Joe: Yep. That’s one of the most important estate planning documents that most of us have. It’s the beneficiary form, the designated beneficiary form. If you have multiple beneficiaries, you want to give it to 20 different people. I would list 20 different people on that beneficiary form versus listing that in my trust or naming the trust as the beneficiary of my retirement account. You could get into a little bit of tax issues there, given recent tax law changes. But it really depends on your overall situation. So I would contact your legal advisor or your financial planner.
So what did we learn today, folks? We’re looking at accessing your savings accounts, right? We looked at different account types to find contribution versus defined benefits, IRAs versus 401(k), post-retirement options. Do you keep it? Do you roll it? Do you spend it or do you convert it? And then passing it on. How does that all work? So hopefully you learned a lot. If you want more information, you know where to go, go to YourMoneyYourWealth.com. Click on that special offer this week. It’s our favorite. It’s our Retirement Readiness Guide. YourMoneyYourWealth.com. Click on the special offer. That’s it for us. For Big Al Clopine, I’m Joe Anderson. We’ll see you next time.
IMPORTANT DISCLOSURES:
• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC. A Registered Investment Advisor.
• Pure Financial Advisors, LLC. does not offer tax or legal advice. Consult with a tax advisor or attorney regarding specific situations.
• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.
• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.
CFP® – The CERTIFIED FINANCIAL PLANNER™ certification is by the Certified Financial Planner Board of Standards, Inc. To attain the right to use the CFP® designation, an individual must satisfactorily fulfill education, experience, and ethics requirements as well as pass a comprehensive exam. Thirty hours of continuing education is required every two years to maintain the designation.
AIF® – Accredited Investment Fiduciary designation is administered by the Center for Fiduciary Studies fi360. To receive the AIF Designation, an individual must meet prerequisite criteria, complete a training program, and pass a comprehensive examination. Six hours of continuing education is required annually to maintain the designation.
CPA – Certified Public Accountant is a license set by the American Institute of Certified Public Accountants and administered by the National Association of State Boards of Accountancy. Eligibility to sit for the Uniform CPA Exam is determined by individual State Boards of Accountancy. Typically, the requirement is a U.S. bachelor’s degree which includes a minimum number of qualifying credit hours in accounting and business administration with an additional one-year study. All CPA candidates must pass the Uniform CPA Examination to qualify for a CPA certificate and license (i.e., permit to practice) to practice public accounting. CPAs are required to take continuing education courses to renew their license, and most states require CPAs to complete an ethics course during every renewal period.
