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401(k) rollovers. Everything you need to know but you were afraid to ask.

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Hey, today we’re going to talk about 401(k) rollovers. You’ve heard about them. You might have a 401(k). You might have multiple 401(k)s. You might be like one of the gentlemen who came to us about six years ago now as a client and he started unveiling all the things that he had, and he pulled out a 401(k) and we said, “That’s good.” He pulled out another 401(k). “That’s good.” He pulled out another one. He pulled out another one. He pulled out another… It’s like kids getting out of a Volkswagen car when we were growing up, when they tried to stuff as many people as they could. This guy had six 401(k)s that had never been rolled over. They were all right with the company. I jokingly told him, I said, “Well, you could get jobs like crazy, but you just couldn’t hold onto them,” because he’d stay somewhere for a while and then he would leave the 401(k) and he would leave it there.

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So what do you do with a 401(k) and what do you do with a rollover? When are you going to have a 401(k) that might be able to be rolled over? Okay, good question.

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You’re going to have a 401(k) that might be able to be rolled over when you change jobs. If you are no longer working at a company, then most likely you can go in and you can take that 401(k) and you can roll it over into something else. We’ll talk about some of the options you have in just a moment, but when you change jobs at any age… I have people who’ve come to me and they’re 26 years old and they roll over a 401(k) that they’ve had, or in their 30s, at every age group, 20s, 30s, 40s, 50s, 60s, I’ve had people roll over 401(k) because they changed jobs.

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Another reason is when you retire. When you’re no longer working there you can roll over a 401(k). Now, real life stuff. We had a guy that just recently retired, two days ago, and so he was all hot to trot for us to get on there and roll over his 401(k). We called this morning and… my service advisor called this morning and he said, “Yeah, we’re here to roll over a 401(k),” and the company said, “Well, in our paperwork he’s still active and it’s going to take a couple of weeks after that,” so we found out that, with this company at least, you have to wait about a month and then everything flows through, the last paycheck flows through, the contributions flow through, but when you retire, you can then roll over your 401(k).

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Here’s another thing that a lot of people don’t know about. When you turn 59 and a half… There’s a law that says you can do what’s called an in-service distribution. You’re still in service for the company. You’re still working there but you can start taking at 59 and a half a distribution out of that 401(k) and moving it in to a real retirement plan.

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You see, a 401(k) is held out as a retirement plan but it doesn’t address income or inflation. It doesn’t address investments and it sets you up to pay a lot of taxes. It doesn’t address healthcare. It’s not really touching all the bases of a real retirement blueprint that you need for retirement, so even the government recognized that and they made a law few years ago, and they said at 59 and a half you can start tapping in to do an in-service distribution even though you’re still working at the company, and you can start building the real retirement plan.

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One other reason they do that, within a 401(k), during turbulent times, during volatile times… Let me say it this way. When the stock market just really goes downhill there’s not normally a lot of safety within a 401(k), because they’re really built for the 25, 30, 35, 40, 45-year-olds and they’re trying to get them to build and accumulate for retirement, but those of us who are ready to retire or in our retirement years and we’re trying to preserve and make sure we don’t lose what we’ve built up, a lot of things in the 401(k) are not really built for preservation. They’re built for accumulation.

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So, three things major that you can do when you change jobs, when you retire or when you turn 59 and a half. Now, when you go through one of those stages you have four options, and the Department of Labor, not a law because Congress doesn’t pass anything, but the Department of Labor came out with a ruling and said, “When you roll over a 401(k), if you’re reputable and you’re working with people, you got to tell them they’ve got four options.

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Number one, they can stay right where they are. They can stay in that 401(k).

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Number two, they can move it over if they’ve got a new job with a new 401(k), they can move it over to a new 401(k).

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Number three, you can cash it out. At that point you can cash it out just like you can at any other time, but you’re not going to want to under most circumstances because it’s going to come out as regular income and it’s going to raise your income for that year, and you’re going to maybe be pushed into a higher tax bracket because every dollar you take out is coming out at regular income, and if you’re under 59 and a half, there’s going to be an extra 10% surcharge penalty on top of all the taxes that you’re going to pay.

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So remember, you can leave it, you can move it with you, you can cash it out or you can… the fourth thing is you can roll it over into an IRA, which most people do that. Why do they roll it over in… No, no, no, let’s talk about some of the stay options okay.

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Why would you stay? Well, why might you not want to stay? You might want to not stay because those 401(k)s have limited options. There’s no active management within most 401(k)s unless you’re paying a high fee for somebody to actively manage within 15 or 20 funds. Really? If you’re going to pay a fee for somebody, let them have a broad scope of options that they’re able to put you in, otherwise they’re just ripping you off. Make sure if you’re paying a fee that you’ve got a big group of investments, three, 400, and very few 401(k)s are built that way. There’s no active management in most of them, so most people don’t stay, and you say, “Well, should I move it to a new 401(k)?”

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If you move it to a new 401(k) you still have limited options. There’s still no active management, and then you’ve got to depend on somebody moving that money, and moving it without making a mistake, because if you make a mistake the government’s really happy to just penalize you, to tax you and to make that thing really be uncomfortable and unpleasant for you. So be careful about moving and staying.

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Do I cash out? We’ve already talked about it. The taxes come out as income and you get a 10% penalty if you’re under 59 and a half.

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So what about a rollover? Why would you want to do a rollover to an IRA? Very simple. Here’s why. You have many more options, almost, I would say, unlimited options. You can form an IRA, you can self-direct it. You can have an advisor work with you. You can start to build part of your retirement plan, like the in-service distribution was built and put into place to do. There’re all kind of options you have if you move it over into an IRA. You can build the plan and start plan building. There’s no tax. If it’s moved over, now you’re going to get a 1099. I’m going to get a 1099. Right, but in Box 2 that talks about income for that year, it’s going to be nothing. There’s going to be no income coming to you. It’s just the government’s way of tracing that money from the 401(k) into the IRA that you’ve moved it into. So you’re going to get a 1099, but it’s just the government’s way of tracing it, and it becomes an IRA, an Individual Retirement Account, when you move it over.

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Now, let me show you something, okay. A 401(k) is like a lumberyard where a real retirement blueprint is a plan. Let me say it again. A 401(k) is like a lumberyard, it’s part of a lumberyard, versus a retirement blueprint which is a plan with your name on it.

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Now, here’s a 401(k). It’s built for everybody. Mostly built for the young who are accumulating money, and it’s a great place to build all kinds of lumber. It’s a great place to build two by fours and doors and windows and sheet rock and plywood and even roof trusses as you really build into it. But it is not a retirement blueprint that addresses your income that’s guaranteed, increasing, that will last as long as you do and as long as your spouse, if you’re married and they survive you. It won’t address inflation. It will address investments, but on a very limited basis. It won’t address your taxes. In fact, it might run up your tax bill because everything in a 401(k), if it’s a regular 401(k), is just simply delaying tax, delaying tax, delaying tax. It won’t address your healthcare issues and it won’t address legacy and leaving it once you’re in the clouds and looking down on the retirement blueprint you have.

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That’s a retirement blueprint, all of those things, but a lumberyard is like a 401(k) to build. Now, what you need is you need to work with an advisor, an advisor who knows how to take that lumberyard and use a blueprint to build it into a plan that will allow you to have a great retirement.

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Should you do a 401(k) rollover? Probably, because you’re going to have a lot more options. Should you do it, how should you do it? That depends on you and your age and your situation and what you want to do, but you need to get some professional advice before you go in and start tinkering with it and maybe do the wrong thing and cost you a lot, a big taxable event, that you might not find out until you file your income tax next year.

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If you want information on doing a 401(k) rollover, you need to contact us, info@mosleywealthmanagement.com, or call us, 714.421.4288. info@mosleywealthmanagement.com.

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401(k) rollover. This was everything you need to know, but maybe you were afraid to ask.