The 401K System is Slowly Collapsing With Little Savings

what happens if you ever find a leaky pipe you're going to slap a tape to temporarily fix the leak until you get a plumber to your house right but what if you have multiple leaks in your pipe then you're going to need to replace the whole pipe but before that you're going to need to turn off the water supply and this country is facing multiple leaks in the 401K pipe right now so to speak and we can't seem to find a way to stop the leaks coming out of everywhere the government is just now starting to realize how behind the American people are with their retirement savings and they're trying to find ways to systematically plug every leak by making 401K transfers much easier in preventing further 41k early withdrawals secure act 2.0 which was passed in late 2021 was one of the first actions Congress took to plug many of those leaks there are two leaks we need to contain their early 401K withdrawal and the lack of 401k transfers when you switch jobs according to Bank of America in 2023 there was an increase of 133% in the number of 401k early withdrawals the average withdrawal amount was just over $5,000 another study showed that 41% of 401k account holders would Drew at least some money from their 401ks when they switch jobs instead of rolling it over to an IRA or 401K but the process of moving your old 401K to a new 401K is still too complicated and hard for the average Americans to understand so let me get into the first part of this video which is the process of a 401k transfer for example I recently moved my old 401K to my solo 401k and that process alone took me almost a month to complete not many people know if they should call the 0 401K broker or the new 401K broker to make the transfer happen and not many people know how to properly fill out the 401K rollover form without the help of a financial professional why does anyone even need a financial professional to make a simple transfer happen from 401k to another that's precisely what policy makers are trying to do by making the rollover process simple for anyone to do if you make a cash transfer from one bank to another with a click of a button why can't we do the same with our 401K 43b 457 tsp or traditional in Roth race right why did it have to take over a month for me to transfer my old 401K to my current 401K so let me explain the rollover process for the next minute you can always schedule your first session with me for free by visiting fire.com coaching let's say you have your 401k from company a from a long time ago the first thing you need to find out is whether it has both WTH and traditional or just traditional keep in mind that Roth 401k is the money you already pay taxes on traditional 401K on the other hand is keeping your pre-tax dollars that you haven't been taxed by the IRS so for this scenario I'm going to say your old employer had both Roth and traditional and you have money in a little bit of both option number one is to initiate a rollover from your old 401K to your current employer's 401k if your current employer has both traditional and Roth 401ks then you can do a simple balance transfer or roll over from your old 401K to your new 401K the transfer is not a taxable event because you're simply transferring your money from one 401k to another but what if your new 401K doesn't come with a raw 401K then you can still do the traditional 401k to traditional 401K balance transfer or rollover but the money inside your WTH 401k will have to stay with the old 401k or you have the option to make a direct balance transfer or rollover to your WTH Ira keep in mind that once you move money from your WTH 401k to your W Ira this is an irreversible process and you can't ever move money back from your Roth IRA to your Roth 401k so some people choose to move it to a Roth IRA or some people choose to keep it in the old Roth 401k until they move to another job that comes with a Roth 401k but what if your current employer doesn't come with the 401K at all then you can either keep your money where it is with the old 401k or you can initiate a balance transfer from your traditional 401k to a traditional IRA and the rollovers you make to your IRA or 401K do not count towards the contribution limits for the year and think of it as a balance transfer from one retirement account to another and you're just moving your retirement assets from the old basket to the new basket that's it but keep in mind that the IRS has certain restrictions on how many times you can make the rollover every calendar year for example if you have multiple IRS and you want to combine them into one traditional IRA and one Roth IRA you can only make one rollover once in any 12-month period so if you have a Fidelity Roth IRA and you decide to move all of that money into a swap Roth IRA in February 2024 then you can't make another Roth IRA rollover until February 2025 and according to this CNBC article many investors cashed out their 401K 403b tsp 457 and IAS not just for financial hardship reasons but simply because they didn't know about the 401 to 401K rollover process or the 401K to IRA rollover process without paying any taxes let me ask you this would you ever take out an ATM cash withdrawal with a 30% or 40% fee you wouldn't right that's essentially what happens when you take out the pre-tax dollars you contributed to the 401K that you haven't paid taxes on I know you feel like this is the hardworking dollars that you contributed but you have to remember that the dollars you put in are not taxed yet so when you you take the money out early you're going to have to pay the federal income tax state income tax and the 10% penalty and if you take the Roth 41k out early you're going to be penalized and taxed on their earnings and interest and before I explain how the conversion process works I want to show you this direct rollover form from JP Morgan Chase and I'm just going to use it as an example but generally speaking all of the transfer forms are pretty much the same and whether you have swab Fidelity Vanguard or other Brokers you're going to go through this form anyway or something similar to this when you make a rollover request you want to contact your new 401k plan or the current custodian who's in control of your 401k 43b 457 or IRA you can't do this form until you have your new account open and you also need to get the account number from your old 401K plan and this is a problem because many people can't find their old 401k account numbers or they don't even know who the broker was you have to contact your old employer's HR to find that out and if you're left on bad terms with that employer that might make things a little awkward or make you hesitate to get in touch with them again right but anyway let's go back to the article here so the new 401K rule proposal is to have six of the largest 401K administrators like a light Solutions Empower Fidelity principle TIAA and Vanguard to create a 401k portal because millennials and genz are more likely to switch jobs than Gen X or the Baby Boomers having a 401k portal could allow people to see all of their 401K accounts in one single portal for example when you move from one job to another your previous job came with a 401k managed by Fidelity and your new job comes with a 401k managed by Vanguard then the portal can automatically allow workers to easily move their old 401K balance from Fidelity to Vanguard or vice versa this way workers savings Left Behind wouldn't be cashed out or left behind and forgotten the downside of the 401K portal is that the 401K broker has to participate in order to have the easy transfer capability so if Schwab decides not to be a part of it then people with Schwab 401K plans would be left out of the portal process those six companies I mentioned earlier covered only 63% of the 401 Market which is roughly around 60 million people and secure act 2.0 gave a legal blessing to the auto portability concept but the concept is not yet applied or set in motion at all at the same time secure act 2.0 created a massive 401K lost and found database so that workers can go back to find their lost dollars and Congress is prioritizing this because every pre-tax dollar that's left behind in a 401k is the tax revenue Vue they don't receive funny how they prioritize things right but that's just the way the business Works in Washington DC here's another problem that American people themselves are facing and that's the lack of cash flow on their budget ever since inflation went Skyhigh in late 2021 there are a lot of things that are still expensive in 2023 car insurance for example went up on an average of 20% year over-year and there are a lot of people who got laid off from the tech sector due to AI Automation and cutting expenses so many people turn to their 401k to make early withdrawals and over 85% of workers who cashed out their 401K ended up draining their 401K this is far worse than taking out a 401k load is it always an inflation problem not necessarily some people have a serious spending problem like I once did that got me into that $110,000 in Consumer Debt including a 401k loan by the way did you know that over 50% of Americans will make over $100,000 a year or living paycheck to paycheck so is it always an income problem or a spending problem if you're having trouble figuring out your budget I encourage you to download a budget app called whap whap stands for you need a budget that's right whether you make $50,000 a year or $200,000 a year every one of you needs to create a budget to Achieve Financial Independence you need to give every dollar a job so that you can be more intentional with your savings and spending you can get a free trial without any credit CR C information by using the link in the description below so let me explain the consequences of taking out a 401k early withdrawal and let's say you have $10,000 that you took out early so that means is that the IRS will automatically penalize you 10% so that $11,000 will go directly to the IRS but not until you file your taxes in the following year you're going to going to receive what's called a 1099r that shows you had a non-qualified distribution from your 401k on top of that you're going to get taxed by the IRS under the federal income tax so fed income okay so if you're taxable income is at the 22% marginal tax rate then you could get taxed at 22 or 24% if not higher if you're at the 24% marginal tax rate with the $10,000 withdrawal then that's another $2400 that could be taken out by the IRS when you fire your taxes if you're single then you could be taxed even higher depending on the total amount if you're in a state that taxes your income that could be another five six or 7% in income tax and we'll just call that five% or $500 okay so your final withdrawal could be from $10,000 down to a total of $4,000 and now your net withdrawal is going to be $66,000 so you could end up losing 40% of the original 401K value for making an early withdrawal and I implore you please do not do this unless this is your absolute Last Resort if you wouldn't take out a loan for 30 or 40% why would you take out a 401k for a 30 or 40% penalty and tax rates and this is another problem that a lot of people don't realize that what actually happens to their 401k if they de de to withdraw early not only do you pay 30 to 40% in taxes and penalties but you lose a lot of earnings and interest over the years for example if you withdraw $5,000 from your 401k early you could lose $45,000 in earnings and interest in 30 years you could lose $30,000 in earnings if your time Horizon is 25 years a lot of people don't realize this when they take their 401K out early you don't just lose your money but you lose the time those dollars could have worked for you with compound interest you can always use my compound interest calculator or download my 401k calculator for absolutely free by visiting v.com resources and the other problem that American people are facing is the extra taxes they didn't plan for it when they made a WTH conversion one of the policy changes Congress is trying to make is to make the rules easier for people to understand how conversions work that's pretty hard to do though since taxes are already complicated enough for people to understand and this is a schwap Roth iray conversion form when you move money from traditional to Roth IRA right the first six pages are pretty self-explanatory and just with the phone numbers account numbers and uh other personal financial information but if you look at starting at page eight at the bottom this is where people get really confused about what they should fill out you can simply do the full amount if you want to convert the entire asset inside your traditional account if you do that you can just put the total cash that you want to convert in this block but if you only want to convert a partial amount then you'll need to enter the partial cash amount in the same block so if you have $10,000 in traditional IRA but you only want to convert $5,000 then you need to put partial conversion for $5,000 now you also need to fill out how many shares of a stock mutual fund or ETF you want to convert from traditional to Roth under inine conversions for example if you have 10 shares of the S&P 500 Index Fund in your traditional IA and you want to convert all 10 shares then you would put down all 10 shares here if you want to do the partial conversion then you put fewer than 10 shares like say five shares and for the tax withholding election let me scroll down here this is crucial to do if you're making a Roth conversion especially if you have a large amount you want to convert so let me show you how it works let's assume that you're single making $75,000 in the year 2024 your marginal tax rate will be at 22% keep in mind that this is after the standard deduction of 14,600 so your adjusted gross income is technically $6,400 this is also assuming that you have no additional deductions adjustments or tax credits so if you decide to make a 10 ,000 traditional to Roth conversion I'm going to add it to 85 now you're still going to be taxed at a 22% marginal tax rate right here okay then you're going to be taxed at 22% of that $110,000 conversion you would owe $2,200 in extra taxes of that conversion so when you go back to the Roth conversion form you'll need to put 22% right here in tax withholding for the federal income income tax and the question I often get is whether you should have the broker withhold taxes for you the answer is it depends the IRS in general requires you to withhold at least 90% of your taxable income otherwise you will have to make a tax payment to make sure you're above the 90% threshold if you don't have at least 90% then you could be penalized by the IRS if you have just one employer then it makes sense to have the broker withhold the taxes for you if you're a self-employed individual or have multiple income sources then the taxes could become more complicated so I would encourage you to talk to a local CPA to figure out your marginal tax rate before you get penalized by the IR and here are some potential solutions that the government could do to fix the 4 wky leakage since Congress a long time ago decided to do away with the pension plan for the private sector they're going to need to regulate the 401 case more by making the 401K portal mandatory for every broker that manages a 401k plan for the American people they already made a mess with the unregulated 401K system there are billions of dollars in unpaid taxes from the lost and found 401ks it should motivate Congress to find those pre-tax dollars and solution number two is a radical one and I like to hear your thoughts in the comment section on this but what if we created a law to stop owing early withdrawals any early 401K withdrawals because the consequences are way too severe but keep the 401K loan in place so that people can still borrow from their 401K for financial hardship reasons a 401k loan has some negative consequences but they're not as severe as their early 401K withdrawal don't get me wrong I'm not recommending doing a 401k loan unless you're in a serious financial situation I encourage you to check out this video that talks about about the pros and cons of taking out a 401k loan and I will link that video in the description below and lastly the government needs to prioritize Financial education high schools are still teaching old literature about Greek gods but nothing about the consequences of taking out a student loan debt a 401k loan or carrying a credit card balance month over month the school system needs to teach our kids how to adult before they become adults how to create a budget how to pay their bills how to live on less than they make and how to file a simple tax form and this has been another Beast of a video and I hope you got a lot out of [Music] it

Channel: FIRE Psy Chat

Views: 2,914

Keywords: financial independence retire early movement, how to invest in 401k, 401k investment strategy, how to pick a 401k investment, how to choose 401k investment in 2024, what is a 401k, 401k millionaire, roth 401k vs traditional 401 k, 401k contribution 2024, 401k employer match, 401k compound interest, 401k investment risks, vanguard 401k investment, 401k vs pension, Rule of 120 investment, 401k target date retirement funds, retire early with 401k, 401k investment guide, 401k

Id: vYRyJmM0sZU

Length: 18min 43sec (1123 seconds)

Published: Thu Feb 22 2024