Click below to listen to Episode 24 – Retirement Plan Rollover Choices

Retirement Plan Rollover Choices

Learn more about different retirement plan rollover options.

The one constant in this world is change. Change happens whether we are ready for it or not.

You just left your current job and have moved on to a new company or maybe you are retiring. Are you wondering what to do with your old 401(k) or other type of company retirement plan?

There are pros and cons with all of your options, and in this episode Bob and Mary Jo will walk you through those choices.

Before deciding whether to retain assets in a 401(k) or roll over to an IRA, an investor should consider various factors including, but not limited to, investment options, fees and expenses, services, withdrawal penalties, protection from creditors and legal judgments, required minimum distributions and possession of employer stock.  Please view the Investor Alerts section of FINRA website for additional information.

HOSTED BY: Bob Barber, CWS® and Mary Jo Lyons, CFP®

Mentioned In This Episode

Christian Financial Advisors
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Bob Barber, CWS®, CKA®
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Mary Jo Lyons, CFP®, CKA®

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EPISODE TRANSCRIPT

[INTRODUCTION]

Bob: Welcome to Christian Financial Perspectives, a weekly podcast where we talk about ways to integrate your faith with your finances. This is Bob Barber.

Mary Jo: And I’m Mary Jo Lyons.

Bob: Are you ready to learn how to apply biblical wisdom to everyday financial decisions?

Mary Jo: Join us as we look at integrating your faith with your finances. If it’s your first time listening, welcome to our podcast, and if you’re a returning listener, welcome back.

[EPISODE]

Bob’s Opening Disclosure:
So welcome to today’s program where we’re going to be talking about 401k and 403b IRA rollovers. But before we get to the program, it’s very important that we disclose the following. This is going to go fast. It’s going to take about a minute, but hang on. The information provided in this presentation is not intended to provide specific advice and should not be construed as a recommendation for any individual. To determine which investment may be appropriate for you, consult with your financial, tax, or legal professional. A rollover from an existing employer’s 401k can involve a complex web of tax rules and regulations. Employee sponsored plan assets have unlimited protection from creditors under federal law, while IRA assets are protected in bankruptcy proceedings only. Laws vary by state. In most cases, cashing out of the account or taking lump sum distributions in lieu of rollover options may carry significant penalties, especially for individuals under the age of 59.5. Please consult a tax professional or attorney prior to making any financial decisions.

Bob:
Let’s get to talking about IRA rollovers. Proverbs 15:21-22, “Folly brings joy to one who has no sense, but whoever has understanding keeps a straight course. Plans fail for lack of counsel, but with many advisors, they succeed.”

Mary Jo:
Ecclesiastes 4:9-10, “Two are better than one because they have a good return for their labor. If either of them falls down, one can help the other up, but pity anyone who falls and has no one to help them up.”

Bob:
Mary Jo, today’s going to be a wonderful program as we talk about the one constant in this world, which is change. Change is constantly happening. We’re not talking about the kind of change from your money. We’re talking about change in life. Change happens, whether we’re ready for it or not. Things like you just left your current job and have moved on to a new company and maybe you’re thinking about retiring or you are retiring. So today, we’re going to help you. Are you wondering what to do with that old 401k or other type of company retirement plan you might have?

Mary Jo:
When you leave your employer, you have typically four alternatives for your old 401k or 403b account or whatever the company retirement plans are. You can number one, cash it out. Number two, keep it where it is, the old employer. Number three, roll it over into your new employer’s plan if they allow it, and number four, roll it into an IRA, or individual retirement account.

Bob:
Mary Jo, there are really some pros and cons of these options that we need to let people know about. First, that one that you said about cashing it out, that can be very dangerous.

Mary Jo:
You are absolutely right. Bob. The rules allow you to cash out an employer sponsored plan, which means you can cash out all or some of it. However, we encourage you to think very carefully before doing this because it can come at a very high price. This money is designated for your retirement and liquidating the account today, short changes your financial future. And if you are under the age of 59.5, you will pay a 10% early withdrawal penalty. You will also owe taxes on the entire amount. It’s added to your taxable income the year it’s received. The rule states that you have 60 days to roll it back to another plan or an IRA. Now, some people might be tempted to use the money or borrow it with the intention to pay it back before the 60 day window is up, and this often falls into that category of best intentions and they miss the 60 day deadline. At that point, it’s considered earned income. As I said a minute ago, the amount that is not rolled over becomes taxable income. And again, if you’re under the age of 59.5, it will come with a 10% early withdrawal penalty. So think very carefully before doing this.

Bob:
It’s kind of like adding insult to injury, isn’t it, especially if you’re a higher income earner. So the other option is to just keep it where it is. And this really boils down to convenience, possibly lower fees, maybe some good investment options, and expertise. Leaving it there might be the easiest option, but, and I say but, you may want to cut ties with that employer. And do you know the financial future of your company that you were with?

Mary Jo:
What if the plan does not have low fees and good investment options? That’s one of the things you want to look at. Does the plan have access to good performing funds in all the various asset classes? And if you don’t understand what it means by asset classes, stay tuned and we’re going to be talking about that in an upcoming episode. The other thing that happens is inertia sets in. You forget it’s there. If you’re young, you’re probably going to have multiple employers over the course of your career and you could easily just forget about that money.

Bob:
Here’s an option that I like, and of course we like, is rolling it over to an IRA. There’s several reasons why this could be the best option. Number one, let’s say, you have several 401ks spread out from prior employers in different places. So you just consolidate and by consolidating the different 401ks into one investment account, it’s going to make it much easier for you to see how truly diversified you are. Does that make sense, Mary Jo, when I say that?

Mary Jo:
Sure it does.

Bob:
Because you may think you’re diversified by having multiple 401ks, multiple accounts, but that’s not true. Many times, you own the exact same thing.

Mary Jo:
There’s a lot of overlap, typically, in that situation.

Bob:
Now you’re with one firm, you get one statement, you have one account number, one login. It’s so much easier to keep up with it. If you’re actually seeking a more diversified portfolio with a professionally, fee-based, fiduciary type advisor like we are, the whole world is open to all the different investment choices where, like you said earlier, Mary Jo in a 401k, there may just be 20 choices or 25 choices.

Mary Jo:
Whoever is administrating the 401k, not the plan provider, those are typically one single company and it’ll have their name. So, you’ll only have access to their funds and not the whole universe of available investments. So your choices are typically limited.

Bob:
Also, individual stocks are something I wanted to point out. Many times, in these 401ks, you don’t have the choice of individual stocks.

Mary Jo:
Most often not, unless they have a brokerage arm, and some companies do some companies don’t that allow you to go into a brokerage account in your retirement account. So, the other thing to consider is coordinating required minimum distributions. For those that don’t know what that is, at the age of 70.5, the year after, you have to begin taking money out of your IRA whether you need it or not. Uncle Sam wants their’s.

Bob:
Mary Jo, I want to say here, this is the good reason why you want one financial advisor if you have multiple IRAs. Because one financial advisor is going to look at all of them, and you don’t necessarily have to take from all of them. You could take from one, but it’s based on the total amount that you have.

Mary Jo:
Exactly. The other thing is Roth conversion options. And we’re going to talk a little bit more about that as well. If you’re between jobs and in a lower tax bracket, it might be a good time to do a conversion because your income is lower.

Bob:
Yeah. We’re going to talk a little more about that later at the end of the program today.

Mary Jo:
Yes. And creating an income stream. When the time comes to retire, how are you going to generate income from accounts at multiple places? That becomes rather challenging. And what if you want to have access to additional investment strategies and investment advice, including biblically responsible investment options like we have at Christian Financial Advisors. You’re not going to have access to that in your 401k.

Bob:
Some other nice things that you’ll in individual IRAs, you have flexible beneficiary designations. We also handle inherited IRAs, multiple beneficiaries, contingent beneficiaries. We go over all that with you. You’re not going to have an advisor in that old 401k to do that. And we understand all the withholding rules, and employer plans require a mandatory 20% withholding as well as a possible penalty for distributions, whereas an IRA would only be a 10% penalty. We’re talking about before age 59.5, and money from an IRA may be drawn without penalties at all for things like qualified education costs, first time home purchases, healthcare premiums made while unemployed. Well, 401k doesn’t offer these exemptions. But I do want to point out that a 401k does offer you the ability, many times, to borrow against that 401k.

Mary Jo:
That’s true, and an IRA does not. We also have if you want access to additional services by your investment provider. At Christian Financial Advisors, as we mentioned before, we are a registered fee-based investment advisor, and as such have to serve as a fiduciary. So if you want education and guidance, if you want investment advice, you want somebody to actually help you allocate your money, and you maybe want financial planning services. A lot of people have some prevailing overall questions. Do I have enough? How do I create an income stream? What about my social security? So those are financial planning questions, and we can certainly help you with those. If you leave it, you are subject to the plan constraints and the rules and possible blackout periods. And what that is is if you work for a company, I’m going to say GE, and that’s not a recommendation. It’s just the name of a company that popped into my head. If you work for GE and they are making their annual financial disclosures, that may be a blackout period when you can’t buy GE stock. So, that’s what that refers to. The self-directed options – if you’re a do it yourselfer, and you want to manage your own investments, there aren’t options for that in your 401k, but you could go to a brokerage company and you could open up your own IRA and do it yourself.

Bob:
Be careful with that, though, because you have no one helping you and guiding you through those, what I call, minefields, especially that the market will give you like it did last year in the last quarter. And if you didn’t have somebody helping you get through that, Mary Jo, I had a do it yourselfer come to me and you know what he did. He sold on the very lowest day in the market. I think it was December 24th. He decided to move out, and we had a huge rebound from that point.

Mary Jo:
One of the biggest advantages of working with an advisor is the discipline that it instills, and we can help you help yourself a lot of times just by talking you through those emotional issues that make you react at the worst possible time.

Bob:
It seems like at the worst possible time is when your famous buyers like Warren Buffet come in and buy everything.

Mary Jo:
That’s true.

Bob:
So here’s some of the reasons to possibly leave that old qualified plan, 401k, thrift savings plan, where it is. Some plans allow for earlier penalty-free distribution options, and there may be advantages if you have employer stock and a 401k or a qualified retirement plan, especially when it comes to net unrealized appreciation, which can be very confusing. Over the years, we’ve dealt with some major oil companies that had these stock options plans in them, and I could just tell that folks are really confused when it comes to this.

Mary Jo:
Oh, it’s a complex situation, and you really need expert advice.

Bob:
So net unrealized appreciation is the difference in value between the average cost of the shares you’ve got and the current market value of the shares held in a tax deferred account. We refer to this, again, as NUA and it’s important if you’re distributing highly appreciated company stock from your tax deferred plan, employee sponsored plan, such as a 401k. And Mary Jo, in the past what we’ve done was we have a CPA that really understands how this works, and we bring a CPA in to help with it.

Mary Jo:
Great idea.

Bob:
Contributions, you or your employees may not be fully invested. So that’s something you’ve got to look at, but leaving it where it is, sometimes you have access to lifetime income options if you leave it and that old 401k, like annuity payments. And if you’re over 70.5 and still working, you may not have to take those required minimum distributions from the 401k or your current employer like you would in an IRA. So this may allow for consolidation into some other plans, but not all employer plans allow for this.

Mary Jo:
That’s true, Bob, and a lot of our listeners are working longer. You’re working into your later years. There are a lot of 70 year olds that are still working. So if you are, you don’t have to take those RMDs from your current plan. So that’s an important thing to consider. You also have protection from creditors and legal judgment. This could be a consideration for business owners. You have loan provisions available in a new employer plan not available in an IRA, but we also caution there. That is a costly source of money. So, if you’re tempted to take a loan against your employer plan, we would encourage you to look for other options, if available. And if you have Roth funds or after tax funds, these need to remain separate from your pretax funds. So a lot of people will put after tax contributions into their 401k, or they may have a Roth 401k. So, you have to handle those differently. And if you don’t have the needed skills to manage your 401k retirement. What’s your expertise? If you’re a plumber, you’re probably not understanding asset allocation and rightly so. Do you know how to efficiently structure your withdrawals, how to do that tax effectively, and how to handle large market declines? Are you an emotional investor?

Bob:
Just last week, Nathaniel in our office was saying, Bob, sometimes I wonder if we should have gotten our major in psychology versus finance, because there’s so much emotion that gets involved in these market declines. Like we’ve had a lot of volatility over the last year and boy, that’s something where people will make those mistakes and just let those emotions grab ahold of them. So here are some types of investment options to consider for rolling over a qualified plan. These options are not exclusive to qualified rollover funds, but can be used for other fund types as well. Choose an independent financial advisor, preferably a Christian one like us here at Christian Financial Advisors. We can help you. The account options are like a brokerage account where you can buy stocks, bonds, or mutual funds and have many choices to invest in. You could go with a direct mutual fund family. Another option that’s been very popular for, I guess, the last 10 years, especially because people get a lot of invitations to free steak dinners at the best steakhouse in town, fixed and variable annuity. By the way, you might want to go back and listen to a program that we made on the good, the bad, and the ugly of annuities, but they do have some good guaranteed income options for life. But gosh, you really need to look at all the fine print and understand you can only take out a certain amount per year.

Mary Jo:
And the cost.

Bob:
Yeah. And the cost associated with that. Usually, the amount you can take out is just 4% or 5% a year, maybe 6%. You’ll see this figure that looks like, Hey, that’s my guarantee, but go ask them for the cash, and that’s not the case. You have to take it out in slow increments, but it does have that guaranteed income option. And the access to managed account options that an independent advisor can give you with institutional quality fund managers is a real plus.

Mary Jo:
Things to be aware of when choosing a financial advisor. You’ll actually find an entire show devoted to this. But for the purpose of today’s episode, we want you to think about, are they a fiduciary? In other words, is their advice all in your best interest, you being the client. And are they independent or are they captive? So whose name is on the door? If it’s not their name, then the advisor might be encouraged to utilize proprietary investment options. The fees may be lower, but I can guarantee you they’re making money somewhere, and it’s probably in those investment options. And are they commissioned based? Some commission based advisors have been known to steer clients towards commission-based products that may or may not be in the client’s best interest. So those are some things to think about.

Bob:
One of the things that you need to look at, if you decide to move your old 401k or qualified plan to an IRA, as most firms now require a roll it or leave it disclosure document and go through that document with the advisor. We do that in our office so that you understand the pros and cons of rolling it over versus not rolling it over.

Mary Jo:
And that is so important. And it’s a big regulatory issue these days. Earlier, we touched on the idea of Roth conversions, and I think we may want to explore this in a little bit more detail before we close today’s show. I’ve always thought it was a good idea to have funds in all different types of accounts. I typically call that diversifying across the tax code. And what I mean by this is it’s good to have funds in after tax accounts, funds in an IRA for tax deferred accounts, and funds in a Roth IRA. When you invest in a Roth IRA, the contributions are not deductible at the time, but the growth on those funds is never taxed as long as you leave it in the account for at least five years. So, you have funds in various types of accounts to use at different times. Let’s talk about that in a little bit more detail.

Bob:
I just want to butt in here. I like it that you say diversifying across the tax code. That’s a really big thing, I think.

Mary Jo:
Yes. So let’s just say the years right after you retire, let’s say you retire at 65, you don’t have to take money out of your IRA until 70.5. So what money are you going to live on in those 6, or approximately 6, years? You want that to be very tax efficient money. So ,that’s a great time to withdraw from after tax accounts. And then if you want to leave money to the next generation, doing so in a Roth IRA. Money that you may not ever need, a good place to leave that is in a Roth IRA. And it’s there if you need it, but if you want to pass it to your heirs, it’s a great tax efficient way for them to receive it. Does that make sense, Bob?

Bob:
It does. It does. And there’s so many tax advantages of a Roth IRA when it comes to creating that retirement income stream, because there’s no RMD requirements at 70.5, like in a traditional IRA qualified plan. And I tell you, every year, all of our clientele, that’s above 70.5, they get worried about their RMD. And like you said earlier, it’s a very good tax advantaged way to leave an inheritance for the next generation. If you think you have more than you’re going to need to live on, legacy planning for your children or grandchildren is great using a Roth IRA, because you never know with your children, what kind of tax bracket your kids or grandkids could be in when you’re leaving an IRA to them. So in a Roth, you don’t have to worry about that, where the distributions are not taxable. And that’s really a big benefit when it comes to withdrawing.

Mary Jo:
Yeah, that’s so true. So another point of consideration regarding Roth IRAs is that many of our listeners will never be able to qualify to fund one directly because they make too much money. And there are income limits to qualify for opening a Roth IRA. However, these income limits don’t apply to conversions. So how a conversion works, you can convert some, part, of a traditional IRA or the entire thing to a Roth IRA. And whatever that amount is, it becomes taxable income the year you do it. So if you’re between jobs and don’t have earned income for a period of time, your income for that year may be lower than it’s going to be in the foreseeable future. So that may be an ideal time to convert some money to a Roth, but you have to have money available to pay the taxes on that. If you don’t have money outside of the account to pay the taxes, we don’t encourage that.

Bob:
And this is where I emphasize that you have a good tax advisor, CPA preferably, that will help you to understand. Does it makes sense to do this Roth conversion, converting your traditional IRA to a Roth. You can do it all at once, but we feel it’s better if you don’t. Especially if you have $500,000 in that traditional IRA. Do it in pieces so that you won’t get hit and pushed into such a high tax bracket. Mary Jo, there’s so much to consider here. I cannot imagine somebody listening to all of this thinking, “Oh my goodness, this is making my head explode because there’s so many different options.” So we understand this and we understand you have many questions, but you know what? We got the answers here at Christian Financial Advisors, and we’re here to help you. So if you’d like to talk about your unique situation and learn more about how a Roth IRA may be a good fit, or if the rollover strategy is something that’s right for you, we’re going to go over all of the pluses and the minuses of each strategy, your investment choices, and what’s the right thing to do. Mary Jo, any other comments before we end today?

Mary Jo:
Bob, I think you just said it there. We’re going to give you both sides to it and not just what’s going to affect us, but we’re going to talk to you about what’s in your best interest. That’s what we do as fiduciaries.

Bob:
Well, I guess that’s going to do it all for today, until next time.

[DISCLOSURES]

Comments from today’s show are for informational purposes only and not to be considered investment advice or recommendations to buy or sell any company that may have been mentioned or discussed. The opinions expressed are solely those of the hosts, Bob Barber and Mary Jo Lyons. Bob and Mary Jo do not provide tax advice and encourage you to seek guidance from a tax professional. Investment advisory services offered through Christian Investment Advisors Inc. DBA Christian Financial Advisors, a registered investment advisor. Consider all available options, which include remaining with your current retirement plan, rolling over into a new employer’s plan, IRA, or cashing out the account value. When deciding between an employer sponsored plan and IRA, there may be important differences to consider such as a range of investment options, fees and expenses, availability of services, and distribution rules, including differences in applicable taxes and penalties. Depending on your plan’s investment options, in some cases, the investment management fees associated with your plan’s investment options may be lower than similar investment options offered outside the plan, but annuities are longterm investment vehicles designed for retirement purposes. The guarantees of an annuity contract, including fixed returns, payouts, and death benefit guarantees are contingent on the plan’s paying ability of the issuing company. Distributions may be subject to regular income tax and a 10% penalty if taken prior to age 59.5. The riders are only available to the purchase of a variable annuity contract, and it must be utilized within the specific confines of the individual contract and may be voided if these guidelines are not followed. The clients should see the prospectus for complete details. Diversification does not necessarily eliminate the risk of market loss.