What Should You Do with Your 401k When You Retire?

most people have a good chunk of their nest egg in their company 401K plan what do you do with that 401k when you retire to make sure you get the most out of it going forward in today's video I'm going to share with you your different options so you can do what's best for you hey everybody I'm James canole founder root financial and I'm here to teach you how to get the most out of life with your money so what do you do with your 401k when you retire if you think this is a basic question with a basic answer make sure you stay through the whole video because there's some real nuances here and some planning points that if you don't get these right it may end up costing you a lot of money but when you're looking at this there's a few key decisions or a few key variables that this all comes down to and what I'm going to do is walk you through each of these decision points so you can understand what's best for you so for starters there's three main options that you have when you leave your company in terms of what to do with your 401k plan you can leave it where it is so leave it in the old company's 401k plan assuming they allow you to do so number two you can take a full cash distribution which means whatever balance you had in your 401k you can just cash that out and take it now it's fully subject to taxes or number three you can do a tax-free rollover to a traditional IRA and even a Roth IRA If part of your 401k is in an after-tax or Roth balance so when you're looking at these three things keeping it in the 401K take a cash distribution or rolled over to an IRA what are the factors that you should be looking at to make the decision that makes most sense for you well first of all the first question is cost now things have gotten a lot better in the last several years but it used to be that 401K plans were incredibly expensive now you didn't always see these costs but between the record-keeping fees the administration fees the internal cost of the funds these costs could quickly add up and now for today it's not uncommon for some smaller plans to have cost totaling two two and a half percent or more of your portfolio value each year but thankfully plans have gotten a lot less expensive over the last several years however that's still the first thing you want to look at What's the total cost of your 401k this isn't always super transparent you might have to go to What's called a summary plan description or go to HR to request this information but you want to understand what's the cost the total cost of your 401k this can be internal costs of the funds you're invested in this can be record keeping fees this could be a illustrative fees this could be advisory fees but get a sense of what's the all-in cost that you're paying now what you want to do is compare that to what would be the all-in cost of taking your 401k and doing a tax-free rollover into a traditional IRA so the traditional IRA you can invest really in whatever you want so you could invest in very low cost options you could invest in very high cost options but at the end of the day you have control so do that analysis does your 401k have really expensive investment options if so you're probably better off moving it to a traditional IRA if your 401k has wonderful investment options you don't need to tap that for a while you don't need to access it for a while you could consider leaving it right where it is now there's some other factors that we're going to look at but that's the first thing I would look at is What's the total cost of leaving it where it is first What's the total cost of moving it to an IRA where you have more control now speaking of control the second thing you want to look at is just that it's control now with 401k even if it has really low costs it doesn't necessarily mean it's the best option for you because again even a traditional IRA you can most likely access similar Investments with similar low costs so next thing you want to look at is control why does this matter well all 401ks are different but I've seen some 401ks where any little transaction you want to make you have to submit paperwork or you have to go through a process online or it can be kind of clunky if you want to do a Roth conversion if you want to take a withdrawal if you want to perform a rebalance it's not really that easy and now this may not seem like a big deal but one of the biggest goals of personal finance is to think about finances Less in just a general law of human nature is the more difficult something is to do the less inclined the less likely we are to actually do it so if there's something that takes a few minutes longer because you have to go through some unnecessary steps because it's a 401k and the process is a little bit outdated you're less likely to do it now if you're less likely to do a Roth conversion or if you're less likely to do a rebalance if you're less likely to do basic account maintenance simply because it's harder to do so through the 401K that's a real downside thankfully with an IRA it's not as difficult typically now it depends of course on where your IRA is but oftentimes you have complete control Ira stands for individual retirement account you personally own it and oftentimes your ability to manage to trade to rebalance to convert to take a withdrawal is a lot easier in a traditional IRA or even a Roth IRA than it might be in a 401k so take a look at that which of these options is going to give you more control because you want ease of use when it comes to implementing some of the things you're going to do to make the most of your finances the third thing you want to look at is investment options like I said with an IRA you literally have thousands and thousands of investment options any individual stock or ETF or a mutual fund you can invest in it now with the 401K because this is a group plan unless you have a self-directed option you're going to be limited now you might have 10 investment options you might have 20 investment options you might have 40 investment options typically what you're going to have when you go to enroll in a 401k is the company is going to say here's what you can invest in if you don't see what you like too bad you can't invest in it now that's not necessarily a bad thing sometimes fewer options are actually a good thing it reduces the amount of overwhelm or the amount of uncertainty if you have really good options great hopefully your plan is going to have a large cap option a small company option an international stock option a domestic stock option is hopefully they're going to cover the bases in terms of all the different things within reason that you might want to invest in are going to be available now you want to look at that though are these good options for you to be able to implement the portfolio that's right for you if so great your 401k might be a nice option but when you look at a traditional IRA like I said you have virtually unlimited options now that can be a bad thing if that's overwhelming to you and you don't really know what to do thankfully with a 401k these options have for the most part been vetted so you're get in some good Diversified options hopefully at a low cost but not always in an IRA you have complete flexibility in terms of choosing whatever investment options you feel are best for you in your financial future the next thing I'd look at is consolidation now I've met people believe it or not they have eight nine ten different 401ks from each of their previous eight nine ten different employers so maybe every two three four years they're going from one employer to the next and every time they just leave their 401K who it is so they start here and have a 401k then I move to a different company and start a new 401K then a different company and start a new 401k before long they just become collectors of these different 401K accounts now you might look at that and say well what's the problem they're putting money in the accounts are staying where they are what if they have really good investment options what the problem is when you retire and you're starting to take income from that which account do you take from first and how do you make sure that you're not being redundant or having too much overlap in terms of what your Investments are when everything's all spread out it becomes more difficult to manage things holistically so one benefit what I often recommend to people is do you start to consolidate those to an IRA or do you start to consolidate in your current companies 401K but the more you can consolidate you know not keeping five six seven ten different 401ks but consolidate those all to an IRA or even your current companies 401K the better off it's going to be it just becomes much easier to track the balance to track how you're invested to track what's your actual total amount to start to understand where is income going to come from when you retire to start to understand which specific fund or account should I be doing conversions from if your money is all spread out to a bunch of different places that gets pretty difficult you want to make sure things are Consolidated just for ease of management to most effectively Implement what's best for you the next thing to look at is ease of use now this kind of is like the control aspect I talked about but when you look at 401ks some are better than others but almost none are as easy to use or easy to implement as a traditional IRA is or a Roth IRA is I talked about this before but when you have a traditional IRA or Roth IRA it's real easy to rebalance to make a trade to take withdrawal to perform a conversion to update beneficiaries to do whatever you need to do for basic account maintenance when you have a 401k some providers are great but lots of providers aren't whether it's having to fill out physical paperwork to take care of something or going through a series of steps to do a rebalance or an update oftentimes IRAs can allow for more control and better ease of use than 401ks but that's something to consider as well and the final thing you want to look at when comparing 401ks to IRAs and what's best for you is coordination now oftentimes when you have a portfolio and let's say you have a 60 40 portfolio or an 80 20 portfolio whatever it is you don't necessarily want to have that same exact investment mix in your traditional account your Roth account and your brokerage account you want to maybe make sure the entirety of that portfolio is 60 40 or 80 20. that's not to say that should be applied the same exact way to your IRA your Roth IRA your brokerage account you maybe want to divvy that up and have different allocations in each of those accounts based upon your withdrawal strategy based upon what your future goals and needs are so if all your accounts are different places and your 401k is here and your brokerage account is there and your Roth IRA is there it makes it more difficult to coordinate by having everything in one custodian or one provider it makes that job a lot easier you can real easily see what's my overall allocation of all my investments and how is that divvied up into each of these individual accounts so that's oftentimes something easier to do if everything's Consolidated in one place as opposed to having your 401k somewhere else and your other investment accounts I'll elsewhere so those are the key comparisons I'd recommend making when deciding what do you do with your 401k when you retire however there's some key considerations that aren't necessarily points of comparison but really important things you need to know before you make any move with your 401k the first is this you may have a 401k balance and depending on what options you had whether it's pre-tax Investments Roth Investments after tax Investments not that whole balance goes to the same account if you're going to roll it over for example let's say you're making after tax contributions to your 401k so not pre-tax not Roth but after tax contributions if your company allows for that provision well if you contribute 10 000 per year for 20 years and you get an eight percent rate of return well that portion of your contribution or your account that would have grown to about 458 000 now of that 458 000 200 000 of it was your actual contribution that was the after tax contribution you made when you roll over your 401 okay that after tax contribution goes to your Roth IRA so because you've already paid taxes on that that goes to your Roth IRA where it continues growing tax-free here's the thing though the growth on after tax contributions that does not go to your Roth IRA that rolls over to your traditional IRA so that 258 000 growth that was on your after-tax contributions that would roll over to a pre-tax traditional IRA so make sure you understand how that works as you're going to roll over this account now hopefully your account or your plan offers what are called in-service conversions which means anytime you make an after-tax contribution ideally it's immediately converted to your Roth IRA if that happens then all of the future growth on those accounts or on those contributions those are now tax-free as opposed to Growing tax deferred and ultimately going to a pre-tax account when you retire that's the first thing to consider the second is something called a net unrealized appreciation if you have company stock in your 401k there's a lot of details around this maybe I'll do a different video to walk through it fully but if you have company stock in your 401k and if there's significant gains on that stock or even just any gains on that stock you are eligible for something called net unrealized appreciation what net unrealized appreciation is is instead of taking your entire 401K balance when you retire and moving it to an IRA you take the stock portion and you distribute it to a brokerage account so you don't roll it over for tax deferred growth you distribute that to a non-retirement account now you pay taxes immediately on that distribution but part of those taxes are paid at ordinary income rates but the benefit is the gain on that contribution on the stock that you bought is taxed at long-term capital gains so a lot of planning around that but make sure you're real mindful of that but before blindly just moving 401K money to an IRA if you have company stock and if there's a Game net unrealized appreciation may be a significant benefit to you and then finally the last consideration to make is if you retire from your company during the year in which you turn 55 or older you are eligible for penalty free distributions from your 401k even before you turn 59 and a half so if all of your money's in a traditional IRA a Roth IRA if you're pulling money out of those accounts before 59 and a half you're subject to a 10 early distribution penalty well if you're looking to retire before 59 and a half but all of your money's in a 401k and thinking what on Earth do I do here well there are some options 72 T distribution some other options like that but one of the biggest ones is do you keep all or even just a portion of your money in your company 401K plan because then it's accessible as long as you worked at that company up until the year in which you turned 55 or later so those are some real important considerations to make as you're trying to decide what do you do with your 401k when you retire now speaking of 401ks and the importance of saving for retirement it's also really important though when should you stop saving for retirement well be sure to check out this video here where I show you when is it time to stop saving for your retirement once again I'm James Knoll founder root financial and if you're interested in seeing how we help our clients at root Financial get the most out of life with their money be sure to visit us at www.rootfinancialpartners.com

Channel: James Conole, CFP®

Views: 44,705

Keywords: investing, retirement planning, tax planning, financial planning, retirement, personalfinance, taxes, dividend investing, financial planning at 50, how do I retire?, long-term investing, financial planning at 60, roth conversions, roth ira, IRA, individual retirement account, benefits of investing, pros and cons of investing, donor advised fund, financial education

Id: Kux3LRJ4JFg

Length: 15min 1sec (901 seconds)

Published: Sat Aug 05 2023