When you change jobs or retire, you generally have the option to move
your money from your workplace plan over to an IRA or an individual
retirement account. So. Is that a good idea? And even if it is
the right idea, do you maybe want to wait until a certain age
or wait a couple of years? That's exactly what we're going to talk
about today. I'm Justin Pritchard, and we're going to go over the pros
and cons of rolling over money from a workplace plan like a 401k
to your IRA, where you have, again, some advantages, some disadvantages.
So let's start with one of those advantages, which is control.
In particular, you have control over the costs that you pay.
So when you're in your workplace plan, your employer picks who the vendor
is and who all the service providers are, and there may be some
additional fees in those types of arrangements. So you're paying people
to do record keeping and administration. The expense ratios of the investments
themselves might be higher than what you can get in an IRA,
so when you put all of those things together, there could be an
opportunity to save quite a bit by using an IRA instead of the
workplace plan. Speaking of the investments, you also have a lot more control
there: You can pick from the broad universe of stocks and bonds,
ETFs (or exchange traded funds) and mutual funds, and many other things within
an IRA. But in your workplace plan, you might have a menu of
just a couple dozen investments perhaps, and again, you don't necessarily
pick that. Your employer generally curates that menu for you. If you'd like
to get investment advice, that's a lot easier in an IRA as well.
Your employer's plan may have some basic advice available, they may even
have a money management option or something in there, but if you have
a financial advisor that you prefer to work with, or for whatever reason,
you want to go a different route on the investment philosophy and all
that, then you can just pick your own advisor. That's something that clients
often do with me is have me handle that since I'm doing a
lot of other things. We of course go over the fees and all
the other pros and cons, but if it makes sense then it's something
worth looking at. And when it comes to taking withdrawals, you're in control
of the tax withholding that happens when you pull money out of your
IRA, but with a 401k, there would be 20%
mandatory withholding, and that means it's just going to be 20%,
whether you want them to withhold that much or not. And the fact
is that most retirees don't pay taxes at that high of a rate. Some
people do, but for many people, that's just more than you need.
Speaking of those withdrawals, that's another advantage of using an IRA.
You have a lot more control there. And it's just easier for you
to actually get the money, and that's the point of saving the money
is so that you can take it out and spend it in retirement.
When you move the money over, you will take care of all of
the administrative tasks and the waiting period and getting signatures that
are all part of getting a 401K rolled over to an IRA.
So once that's done, it's in your IRA and it's very easy to
take withdrawals. You can link your bank account with your IRA,
and often the funds are available to withdraw maybe the next day after
you sell something, if it's a mutual fund, for example. It's very easy
just to zap that money over to a bank account, or you could
have a link to brokerage account, even at the same investment provider.
Maybe you have a debit card there and that money is available for
spending very quickly, you don't even need to wait for the ACH transfer,
which is pretty fast, but they can take one to two days. You
basically have access to that money more or less within one business day,
the. Thing that surprises a lot of people, especially in this day and
age, is that when you take money out of a 401K and put
it in an IRA, they often actually cut a check, like an old
paper check, and of course that needs to go through the mail or
go through a courier service at an extra fee, but either way you
have to deal with a check, you have to get it into your
brokerage account, perhaps wait for the check to clear. So this is a
big deal when you can take care of that ahead of time,
then the money is much easier to access when you actually want it.
Okay, a couple of other advantages are going to apply to unique situation,
so that might be when you die, maybe you want to have certain
beneficiary options set up, and if your 401K plan doesn't accommodate that,
then that's one reason to consider moving the money over to your IRA
instead. Sometimes there are issues at your employer, so
somebody may need to sign off on your distribution before you take the
money, and that can be difficult if that person's not around.
It might be hard to find the person. This is especially something that
happens in very small companies. In a large organization, probably not something
to worry about, but it can certainly happen at those 10 or 15
person companies. Whoever it is that needs to sign isn't paying attention
to their email or they are not available, or for whatever reason,
they just don't get it done quickly. There can also be issues if
your employer goes through some sort of merger or reorganization and the
401K plan gets frozen, maybe they're going to transfer the 401K,
you might even get notification of this ahead of time, and you might
think, Well, I won't need the money. But if you in fact do
during that period, you are forced to wait until all of that is
cleared up and then you can eventually get access to the funds.
So again, this is just about making it as easy as possible for
you to get the money when you are ready to spend it.
This is, again, the whole point of saving it, and you don't want to have
to deal with contacting your employer over the next whatever, five years
or 25 years that you might be in retirement. We want it to
be as easy as possible for you, once. You reach age 72,
you may be required to take required minimum distributions or RMDs from
your retirement accounts, and that can be quite a bit easier if you
do have assets consolidated into one or more IRAS, so when you have
all of your retirement accounts in IRAS, and maybe it's a couple of
different IRAS, you can take that required amount just from one of them
if you want. You don't necessarily have to take a little chunk out
of each, which can be convenient if that's what you prefer to do,
but 401K plans don't let you do what's called "aggregating" those distributions,
so you would in fact have to take a distribution from each 401K
plan individually and what that means is setting that up logistically,
possibly paying a fee to each one of those when that happens and
keeping track of it. So if it's easier to just do that from
one account or from IRAS that are, again, easier to deal with.
I think that's potentially an advantage. One pitfall to be aware of here
is that if you are still working and the company has that 401k
and you're not an owner, so you want to look at a bunch
of different rules carefully here, don't just rely on this video,
but if you are still working, you may be able to avoid those
RMDs and even after age 72, so that's one reason to consider keeping
the money in a 401k. Let's look at some other reasons to avoid
or at least delay moving the money over from your 401k to an
IRA. A big one here is age 55, so if you separate from
service, if you stop working at that job at age 55 or later,
you can potentially take withdrawals without a 10%
penalty tax, so that's the early withdrawal penalty tax, for example.
Now, you will probably still need to pay income tax if it's pre
tax money and would otherwise have income tax due on it,
but you can avoid that penalty tax, so that's during that period between
age 55 and age 59.5, which is when you could pull it out
of an IRA without that early withdrawal penalty. So again, if you stop
working after age 55, but before age 59.5, you might consider at least
leaving the funds in your 401K for a couple of years,
also, some 401K plans are priced very competitively, this would particularly
be the case, most likely, if you work for a very large organization.
So a multi national corporation or a big university or a hospital system
or something like that. You could potentially have a very affordable retirement
plan at work, and maybe you're not going to save much or anything,
in fact, you might pay more by moving the money over to an
IRA. So you want to evaluate these things and just look at all
of the pros and cons, and if it doesn't make sense cost wise,
then you can leave the money there, again, look at what are the
distribution options and if those are acceptable... That's great. If you're
concerned about creditor protection, whether that's bankruptcy or money
you borrowed or some other kind of liability, then this is going to be
something you'd want to look at very carefully. Check with your state laws,
check with an attorney who is licensed in your state to practice law,
because there may be some advantage to using one or the other,
so I'm not going to get into that here, but I will leave
something in the description that you can read to just get a little
bit more information on creditor protection. Roth conversions are another
biggie. And by the way, before I forget, please subscribe to this channel,
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so thanks for doing that, and thanks to everybody who's already subscribed.
So when it comes to doing Roth conversions, that means taking
pre tax money in your pre tax IRAs and converting that to after
tax Roth money, any pre tax money can interfere with that,
it's called the pro rata rule, and it can lead to you having
to pay taxes when you might not necessarily need to do that,
so if you are able to keep money in a 401k,
it doesn't count towards that pro rata calculation, that's a good reason
to leave money, or have money, or even put money into a 401K.
If you have a Roth conversion strategy going on. Again, there are pros
and cons, and sometimes it makes more sense than others, so just look
at all of that in the big picture and check with a professional
if you need help. If you decide that moving money from your 401k
to your IRA makes sense. Here's exactly how to do it.
So logistically, you want to go to your employer or the former employer,
that's where you're going to make the request. You generally don't go to
the receiving firm or wherever your IRA is. You generally want to go
to the employer and you're going to request that they do a rollover, but
it's very important to get the details right. I'm going to tell you
exactly what you want to watch for. You will typically submit that request
either online or perhaps by phone or by filling out a form,
any of those will work, it just depends what you prefer and what
options are available, you're going to want to have some information handy
as you submit that request, so that's going to be the name of
your IRA provider, they might be an investment company, a brokerage house,
a mutual fund provider, for example, and an account number can be handy,
not necessarily always required, and then you're going to want to decide
or have an address available for where they send that check,
some places insist on or suggest that it goes to your home instead
of going directly to the IRA. There are pros and cons to each.
The more important thing is that the check gets made payable to your
IRA and not to you personally, but you can decide where the check
gets sent. To avoid a catastrophe. I cannot over emphasize this.
You just want to make sure that the check gets payable to your
IRA, so it might be payable to "XYZ Investment Company FBO your name,"
and that FBO means for the benefit of... And this is something that
if you do this on the phone with a representative, you can say
"What's the check going to look like, who is it going to be
payable to?" that sort of thing, and that way you avoid having the
check made payable directly to you, as you are going through forms,
whether you're submitting this online or even having a conversation with
a phone rep, you want to look for the language or say the
words that you're doing a "direct rollover to an IRA."
That way they know not to make the check payable to you,
because that will cause problems. Again, you'll have that 20%
mandatory tax withholding, so not all the money is going to make it
over to your IRA, it's a distribution, it could be penalty taxes on
top of it, and then you would need to come up with that
money that the IRS has to make the rollover whole, so that can
be problematic in a number of different ways. And here's a quick tip
for you, if they ask about tax withholding, if you want to have
state or federal taxes withheld, that's a bad sign. Because with an IRA
rollover, you should not be withholding taxes or paying taxes, it generally
shouldn't be a taxable event, they should be sending 100% of the money
from the 401K over to the IRA without sending any of it to
the IRS. So that's a red flag. You can say, "Wait,
let's just back up and make sure that we've got this right.
Is it a direct rollover from the 401k to an IRA?"
So I hope that's been helpful. If it has been, please leave a
thumbs up. That helps me know I'm on the right track and it
helps get the word out to other people, so thanks, and take care.