Should I Roll Over My 401k?

hey what's up everyone the let's been here for money evolution in today's video I'm gonna be helping you to answer the question should I roll over my 401k so if you've retired and you separated service from your company maybe you have a 401k plan that's hanging out there maybe you change jobs and maybe you've done it a couple of times maybe you have more than one 401k so in today's video I'm gonna be talking about some of the pros and the cons of rolling your 401k over to an IRA versus leaving it in the plan and also talking about what some of your options actually are with that old 401k so before we get started hit that subscribe button and let's jump right in so first let's start off by talking about what your options are with a 401k plan that you're no longer contributing to where you've separated serviced or retired from a company so number one is you can just simply leave it where it's at a lot of people I think are maybe falsely under an assumption that they have to move that 401k plan within a certain period of time that is simply just not the case you do have the option to leave the money in the 401k plan and continue to manage that with those investment options and choices that you have with the 401k of course you're not going to get any match or be able to make any new contributions to that but that is one option just to simply leave it where it's at if you're going back to work and your new company has a 401k plan and allows for rollovers you can take the money that's in an existing 401k plan that you're no longer contributing to and you can roll that money directly over to your new company's 401k plan this is something that quite honestly I'm not necessarily a big fan of because once you put that money in the new 401k now you're under all of the new rules and restrictions of that new plan and even if you like it you like some of the options that company is under no obligation to keep those choices they can change them at any time and and you don't have any choices of that you've got that money tied up in that new plan you can also cash the money out that's the third option so again not my favorite option but if you say hey you know what I just want to take my money spend it do something with it you can just simply request a check they're mandatory withholding is going to be 20% of whatever that account balance is to send to the IRS for the taxes now that 20% that may or may not necessarily be what you necessarily owe on the taxes your tax rate could be much higher than that could be you know he could be in a 25 or 30 percent tax bracket if you're under fifty nine and a half you could also have a ten percent penalty in there as well you know if you're in a lower tax bracket twenty percent might be too much and you might actually get some of that money back at tax time but be very aware of what the tax consequences are of just simply cashing that money out and then the third option of course is to roll it over to an IRA and so if it's a traditional account you're gonna roll it to a traditional IRA if it's a Roth account you're gonna roll that money over to a Roth IRA and sometimes you might have money in both you might have money in both a traditional account and a Roth account so you're gonna roll that to the appropriate accounts and that's going to be through two separate checks and you want to do that through your employer sponsored plant and do that as a check made out to the financial institution that you're rolling the money over to and have the letters FBO or for the benefit of written on the check so that way there's no tax withholding taken out of that that check so those are your four options with what to do with the 401k okay so now let's start talking about some of the reasons that you might not want to roll your 401k plan over to an IRA so I think number one on this list is what is known as the age 55 rule so if you separate service on or after your 55th birthday you can take penalty-free withdrawals from a 401k plan pay the ordinary income taxes on it but avoid the 10% penalty and so this is something that's very useful for any of you that might be planning on retiring early where normally your normal distributions from an IRA account are age 59 and a half the 401k plan allows you to start taking those penalty free distributions as early as age 55 as long as you separate service after your 55th birthday so it doesn't work if you retired at 53 and you wait two years until you turn 55 you had to have separated service after your 55th birthday the second thing is that if you're still working and contributing to your 401k or even if you're not contributing to it but if you're still working for the same company where your 401k plan is and you turn 70 and a half you can forego taking distributions from a 401k if you roll that money over to an IRA even though you're still working they're going to mandate that you start taking those distributions from that IRA account so the 401k plan if you're planning on working after reaching age 70 and a half is going to allow you to defer having to take those RMDs those required minimum distributions and then finally the last thing that I want to talk about here is what is known as net unrealized appreciation so this is very important if you have any company stock inside your 401k plan you may qualify for some favorable tax treatment on how you distribute that stock so let's say that you work for a company you've contributed money to that stock over the years and let's say that you put in $50,000 in total into that Company stock and let's say now that stock is worth $100,000 so what you're able to do is basically take an in-kind distribution of that company stocks you're basically gonna roll over or roll out I should say a hundred thousand dollars of that company stock and at the time of the distribution you're only going to have to pay taxes on $50,000 that was your contribution to that other words of the cost basis of that you're gonna pay taxes at your ordinary income tax rate just like any other distribution from from an IRA or 401k plan but the extra fifty thousand dollars of growth gets classified as net unrealized appreciation and when you go to sell that stock you could qualify for a long-term capital gains tax treatment which for most people probably watching this video is a maximum of fifteen percent if you're in the highest tax bracket it could be twenty percent you could have a Medicare surtax and things like that but for most people probably gonna be maxed out at a fifteen percent tax rate so it could allow you to again it's another way to access some of the money in your 401k plan possibly early if you want but also do it at a reduced tax rate now let's talk about some of the reasons that you might want to roll your 401k plan over to an IRA so I think number one on this list has to be access to more or your opinion better investment options so with 401k plans remember one of the things about 401k plans is their investment menus are usually going to be very limited maybe you have as few as six investment choices on some 401k plans with not a lot of options even some of the ones with a lot of options that number really rarely gets much more than 40 or 50 funds so if you have that money in an IRA account depending on where you have it you can literally have access to thousands and thousands of different investment options lots more flexibility one of the other reasons is that you might also want to get some financial advice so with a 401k plan you're really not going to get any financial advice from the plan sponsor if you have the money in an IRA account you could go out find a financial adviser they can help you construct a portfolio manage your risk maybe even do a little bit of financial planning in there for you as well so access to more or better investment options and also access to financial advice would be some of the main reasons for rolling that money over to an IRA the second reason for rolling over your money to an IRA is fees so contrary to what a lot of people might think is that 401k plans are not free you do pay a cost for that fortunately back a few years ago the Department of Labor now starts mandating that companies disclose what those fees are to their investors so you can get that in your quarterly report or maybe go online to where your 401k plan is custodian and you can look up what those fees are but they can be a pretty wide range so on a smaller plan you might have fees as low as 0.72 of a percent all the way up to as much as two point eight percent for a plan with total assets of a million dollars or less even some of the larger plans unless we're talking about the mega large plans even those could start having some pretty high average fees according to plan sponsor comm the average cost of a 10 million dollar plan is about 1.3 9% so by rolling that money over not in all situations but you might actually be able to find a place where you can have your money and have it be at a lower cost so that's another big reason potentially for moving your money over to an IRA account so a few last reasons for rolling your money over from a 401 k plan to an IRA account so one of those is the statement so with your 401k plan oftentimes you're only getting a statement on a quarterly basis again this is going to depend on the financial institution that you roll the money over to but with most IRA accounts you're probably gonna get a monthly statement another thing is that IRA accounts to be a little bit easier to track so a lot of 401k plans have gone to what are known as collective Trust which means they're kind of like mutual funds but they're mutual funds specific to that particular 401k plan and those are not funds that you're going to be able to put onto your smart phone and really track the value of whereas if you have that money in a self-directed IRA account you're going to be able to put those ticker symbols in chances are and you're gonna be able to track those a lot more closely there's also going to maybe be some better tools that might be available to you through an IRA account versus the 401k although I've seen some decent tools on the 401k side as well but that's going to be one of the other reasons for rolling that over also as it pertains to estate planning IRA accounts are usually going to give you a little bit better options for choosing beneficiaries on an IRA account as opposed to a 401k so when it comes to naming let's say a spouse as a beneficiary your spouse is going to be able to take over the assets of your 401k plan in most situations but if it goes to a non spouse a to your children or to your grandchildren a lot of 401k plans are going to mandate the full liquidation of that account within five years which is gonna really kind of in some cases push them up into a higher tax bracket so an IRA account is going to allow for what is known as a stretch IRA and so those beneficiaries that are non spouses children or grandchildren can inherit those assets take a required minimum distribution off of that account every year and as long as they stick to that schedule they can continue to defer those taxes out into the future so estate planning flexibility is going to be another reason for that the last thing here as it pertains to our MDS so if you have your money in an IRA account or even if you have your money in five different IRA accounts when it comes time for your required minimum distribution you can calculate the total amount of your RMD and you can take that a little bit from each one of those five IRA accounts you could take it all out from one you could split it between two accounts however you want to do that as long as you take out that minimum required distribution on a 401k plan if you have money that's Anaya raised and you have money that's in maybe a couple of separate 401k plans on the 401k side you need to sure you're taking at least the required minimum distribution from each of those 401k plans so you can't say hey I took a little bit more from my IRA account or I took a little bit more money from this 401k therefore I don't have to take as much from the other 401k that's going to get you into a penalty situation so so our MD flexibility is going to be one of the other last reasons for doing the rollover from a 401k to an IRA so there you have it those are some reasons to roll your money over to a 401k and there's also some reasons to maybe leave the money at the 401k plan where it's at so very important decision make sure you're exploring you know all of your options make sure you understand the pros and the cons of any decision that you're thinking about making if you'd like to reach out to us we're here to help as well and check out some of our other videos make sure you hit that subscribe button and I'll see you back here soon thanks you

Channel: Money Evolution

Views: 48,351

Keywords: yt:cc=on, 401k rollover, wealth management, 401k rollover to ira, retirement planning, 401k investing, ira rollover, roll over 401k explained, rollover 401k, how to rollover a 401k, how to rollover your 401k into an ira, 401k explained, 401k explained simply, 401k investing basics, wealth management advisor, financial education, financial planning

Id: e3eYwF0sBiE

Length: 12min 6sec (726 seconds)

Published: Sat Jun 15 2019