Episode Transcript:
Intro/Closing: 00:03
Welcome to the Real Talk Retirement Show, where we explore the financial side of retirement and beyond. Whether you’re currently retired or planning for the future, we offer real, relatable conversations about money and personal finances. Most importantly, we dive into all these topics using Real Talk. Now, let’s get real about your money and your retirement.
Brian Graff: 00:28
Welcome everyone to another episode of the Real Talk Retirement Show. We are Brian Graff and Tracy Burke, back with you from Conrad Siegel. And today we are going to discuss the topic of what to do with your 401k when you retire. Super important. I think everybody knows that 401k plans have certainly become the most common workplace retirement plan these days. And you know, people spend their entire careers, hopefully, uh saving money in these plans. And, you know, that’s kind of the easy part, just uh putting money away, paycheck after paycheck, letting it do its thing in the market. But then one day you retire. And, you know, Tracy, now what?
Tracy Burke: 01:12
Yeah. And it’s, you know, first of all, it’s it should be an exciting time, right? Retirement’s what you’ve been building up to. But then, as you mentioned, what to do with your 401k, that can be a big decision. You know, there’s there’s uh uh multiple things that can be impacted, you know, taxes, uh, what fees are gonna be, um, you know, general flexibility, how how to create income while in retirement. So, you know, our viewers have heard us say this before. You know, what we’re gonna talk about is not a one size fits all, right? There’s a lot of factors at play. So just to set the stage a little bit, you know, imagine a gentleman named Joe. Um, so Joe’s standing at the edge of the of a forest trail. And for the past 35 years, he’s walked a path steady, predictable, always moving forward. And on his back for for this uh you know hike, in a sense, he’s been carrying a backpack and it’s well packed. And basically it’s his 401k on his back, right? So it’s full of gear that he’s collected over the years. It’s investments, um, you know, the contributions he’s put in, the employer matches, all those type of things. But now, after this 35-year journey, he’s reached a fork in the trail. And before heading on to this next stage of his journey, so he has multiple options. Does he go left? Does he go right? Does he take that center path? Uh, you know, many different options. So, again, that story, you know, just sort of sets up the that you know practicality or the emotional crossroads that a lot of retirees face within their 401k. Again, what to do with it when they retire? So, again, today we’re gonna break down what options you know folks have. And then also we’re gonna tee up, I think it’s four or five questions that the people should ask themselves that can helpfully lead to the most proper decision for them.
Brian Graff: 03:05
Yeah, great, Trace. I like that uh story about Joe in the in the forest. I’m glad he had a uh backpack, not like a fanny pack that might not fit a lot of 401k assets in there. Um, but yeah, let’s get let’s go through those options um and kind of take them one by one. Option number one when you retire is you know the option of taking a full cash distribution from your account. So that means basically you withdraw your entire balance in your account and you get immediate access to all that money. You know, send me a check. Super enticing, right? Um, but this typically does come with a significant tax impact, uh, except for maybe any Roth money you have in that account. So I think with that in mind, it probably goes without saying that uh a cash distribution option is typically the least tax efficient route to go. Um and lots of your money may go to the IRS. And Tracy, nobody wants that, do they? For sure. So yeah, so basically, if you don’t need access to this money right away, and if you plan correctly, hopefully you don’t, we’ll go other go over some other options here. So then we have option number two, which is just to simply leave your money in the plan. Uh if your workplace retirement plan allows it, and honestly, most do by law, as long as you meet the minimum account balance requirement, you can just leave your money right there in the 401k plan. And that can really be a simple, straightforward option for a lot of people. Uh, and it might certainly be easy just to not to do anything at all, but you do want to make sure that you understand the plan, how the fees work, the different investment options that you’re in, and just how comfortable you are managing the account and distributions from that workplace retirement plan in retirement. Uh, I will also note that eventually you will need to start taking some money out of your workplace retirement plan uh with what we call required minimum distributions starting at age 73. You know, the IRS wants their cut at some point. So uh they say you need to start at age 73. Or by the way, age 75 is kind of the new RMD start date if you were born in 1960 or after. Tracy, anything to add to that?
Tracy Burke: 05:13
Well, yeah, you know, with this leave it in the plan option, you know, that’s probably the easy route, right? You know, most employers uh do prefer to get you out of the plan. So when you retire, and I know it’s maybe something we we don’t always think through, but a lot of employers do want, you know, their retirees to move out, and it might be saving them real costs. Um, you know, if there’s fees involved uh that the company in particular is paying uh to providers, or you know, also can reduce administrative burdens. Um, of course, within this option, as you sort of said, you know, there are laws out there that require employers to keep uh retirees, but there’s also laws out there that that 401k providers or what we call plan sponsor, the employer, can set up their own, you know, their their set of rules within parameters, right? So the employers really set the rules, of course, in the 401k. And sometimes, you know, we’ll see there’s restrictions on distributions, um, meaning that sometimes you just can’t take what you want from the account when you want it. You might be forced down a certain path. Uh, I think that might be one of the bigger restrictions. But you know, again, you know, overall, I would just say that 401ks are designed to accumulate assets during your working career. And while in some cases it might make sense to keep into the 401k, uh leads to a third option. So the third option we want to talk through, Brian, is you know, rolling that 401k balance into an IRA. Or you mentioned, you know, some folks might have Roth IRA balances, or moving that into the Roth uh a Roth IRA as well. So again, rolling your 401k into an IRA just allows you to maintain that tax-deferred status. So you’re not, there’s no tax complications or tax uh you know inhibitions that that you’re going to come across at that point, right? If you cash it out, yes, but if you roll it over and the keyword is being rolled over, uh, you’re not going to have any tax uh you know consequences. You’re just gonna continue that tax-deferred status. But you’re likely going to gain access to a broader range of choices and more flexibility, uh, more investment options that you have out there. So I think you know, what we’ve seen, at least in a lot of instances, this is the most common route people will end up going, rolling it into an IRA, uh, especially those people who are working with a trusted advisor. Uh, and again, this is because of some of that flexibility it gives you. If you think about it, the the name of an IRA or what that means, it’s an individual retirement account. So, you know, it’s not wide open, you know, the Wild West in terms of rules, but it eliminates most of those potentially restrictive rules that many 401ks might have uh for retirees. So basically, you can take what you want when you want. And the second option or the second component of it really is, you know, you have that open uh canvas, so to speak, of investment options that you can use. Uh in IRAs, you can invest in nearly anything that’s out there, you know, whether it’s you know, Amistay Mutual Fund or exchange traded fund, you know, very popular vehicles. Um, you can invest if you want to in individual stocks or bonds. And while even getting you know much more complicated, you you can even get into more eccentric investments. Uh, you know, some people own rental real estate properties uh within an IRA. That gets really complicated, and we’re not suggesting that that’s a good route for most people, but again, just sort of highlights that flexibility within the IRA structure.
Brian Graff: 09:03
Yeah, and Tracy, you mentioned uh, which is really important, when you do a rollover from one qualified retirement plan account to another, like you said, there’s no tax consequences. So you don’t have to worry about a tax bill. But I think it’s also important to point out that even if you’re under the age of 59 and a half, let’s say you retire early, which is great, uh, no penalty either. I know people get afraid of moving their money out of a of a workplace retirement plan before 59 and a half and fears of penalty. I just think I wanted to mention real quickly that if you do that rollover, same thing, penalty won’t apply as well.
Tracy Burke: 09:31
Exactly. Yep. And lots of flexibility again. So let’s let’s sort of transition now that we outlined those really, those are the three options you have, right? Um, sort of framing some questions that I think you know folks should ask themselves uh of to help with that decision. So, you know, the first question of of that one, um, I would say is what are the costs? So, Brian, why don’t you talk us through some thoughts uh on that question?
Brian Graff: 10:01
Yeah, well, like with anything else, Tracy, cost is always a huge consideration, right? So it is important to kind of look at your all-in costs, which can be a little bit tricky to pin down in a 401k plan. But you know, when you think about fees in a 401k, they’re often spread across record keeping fees, uh custodial fees, you know, the bank who’s holding the plan assets, investment advisory fees, the fund expenses themselves, those investment uh expenses. So there’s a lot of things going on there under the hood. Uh, and you can normally find these fees outlined in certain plan documents that are available to you as a participant in the plan. But if you’re not sure and you can’t find it, ask. Uh, make sure you ask that question of your employer or of your providers to have a true understanding of what the fees are associated with that plan. Um, Meta 401ks have become more affordable uh in recent years, but you know, the costs still do vary. And it’s important to note that uh a lot of employers, while they may cover the cost of the plan during your working years, uh, and many pass it along to participants the whole time, but even those that cover the fees while you’re working, uh, once you’re no longer working for that company, they stop paying those fees for you. So you will pay your share of fees as a former employee of that company. Um, IRAs, though, of course, can certainly be cost effective, though, you know, the fees in an IRA may depend on your investment choices and whether or not you’re working with uh with an advisor.
Tracy Burke: 11:31
Yeah, and I would just say as a side note to that, you know, working with an advisor, um, you know, advisors don’t work for free. Um, you know, some folks will say, well, my advisor doesn’t charge a fee. Well, they’re working on commission or there’s some some way they’re making money, right? Uh, but a good trusted advisor, you know, from a cost of advice structure should provide value that should exceed that fee you pay her or him, right? So ideally, you know, having that good advisor managing your retirement portfolio should yield better results even after fees are considered than you can do on your own from that standpoint. But absolutely fees is is a massive consideration, which is why we sort of led that maybe as the first question to consider.
Brian Graff: 12:16
So that’s often often overlooked, Tracy, right? I mean, it’s just something that they’re a lot of times they’re not right in front of you. People don’t ask, and they you know they could be uh potentially thrown away a lot of money just in fees alone.
Tracy Burke: 12:26
Yeah, yeah, completely uh making sure that you’re you know uh knowing exactly what you’re paying, as you mentioned. So that next question really becomes about the investment choices or you know, which which of these three options gives me the right investment choices that I want to do. So if you think about it from um, you know, within a 401k, you have a a fund menu, right? It’s a designated set of funds and you can select from. Uh, as I mentioned a few moments ago, IRAs normally offer a much wider selection of investments, uh sort of open architecture. Um that can be a benefit, and maybe it’s not an important one, but for some maybe it is. Um, and you know, also can be a risk if you’re not sure how to navigate all those options at that point. Uh IRAs, you know, give the flexibility in terms of to figure out however you want to invest. Generally, that you can. So recently my son and I were um in in Austin, Texas, and we we were at a a barbecue joint. You know, that’s where you got to go, uh, unless you’re a vegetarian, but um, you know, uh when you’re in Texas, you gotta get some Texas barbecue. Oh, yeah, absolutely. So, Brian, get guess what they serve at the Texas barbecue joint. Well, I’m gonna guess they probably had some barbecue on the menu. Yeah, yeah, how about that? So, like, you know, like other investments, they serve a specific type of food, right? So if I was in the mood for, let’s just say, seafood, even fish tacos, whatever it is, you know, uh, I was just completely out of luck that night, right? So, similar with 401ks, there is a limited menu that that is out there, while an IRA sort of allows you to invest in in most things. So just bringing it, you know, in into um you know, bringing that to light a little bit. But I would say speaking of flexibility, yeah.
Brian Graff: 14:22
The the next question we’re going to address is which option gives me the right amount of flexibility and control? Uh now I’m hungry for barbecue, by the way. Tracy, thanks a lot for that. But yeah, so what option gives me the right amount of flexibility and control? And I will say this IRAs really are flexible in a lot of ways. Uh, within an IRA, you can do things like Roth conversions. Uh, we won’t get into the specifics of that right now, but that’s that’s a that’s a real thing, and people do it. Um, setting up your own withdrawal schedules, taking monthly payments, quarterly payments from your IRA, really easy to do. And even rebalancing your account can be more streamlined in an IRA. Uh, with that said, though, many 401 plans do offer improved tools in these areas. And some 401k providers offer different withdrawal features that you know may or may not be desirable to you based on your income needs in retirement. So you don’t discount the 401k plan right away when thinking about flexibility. Um, and related to flexibility, the next question to consider is how important is convenience and consolidation? Um, and the truth is, Tracy, you know, everyone values convenience differently, right? Uh, for some, it really helps to stay with what’s what’s familiar. You know, my my 401k has been doing great. I like the provider’s website, they got great customer service. I’m just I’m just leaving things alone. Uh and for others, it means kind of choosing an account that aligns well with their broader financial picture, or maybe it’s part of an advisor relationship. So again, convenience consolidation means a little bit of something different for for everybody. Uh, one important thing to note that you know, many people collect retirement accounts from multiple plans over the years. You work for several employers, you got a bunch of different accounts at different places, maybe IRAs. Uh, and some people certainly find it easier to consolidate everything into fewer accounts to really make that income planning easier. And that is typically our recommendation as well. You know, there’s nothing wrong with having all those accounts out there during your working years, uh, doing a little bit of different things investment-wise, if that’s what you prefer. But once you’re retired and you start, you know, getting ready to take those withdrawals from your accounts, having one account really does simplify things and is often the preferable approach.
Tracy Burke: 16:44
Yeah, simplification is certainly something that uh you know benefits a lot of folks at that stage of life. Yeah. Um, so the the last question that we think is important to ask yourself when you’re in this situation, you know, is is regarding taxes. You know, how will my selection impact my tax situation? Uh, you know, as we said earlier, if you take a lump sum, that cash distribution up front, you know, significant negative tax implications, right? And if you have a sizable balance, that’s a ton of unnecessary tax implications in that first year. Um, so again, normally that’s not a good option or approach for most people. But uh, you know, here at Conrad Siegel, we often like to look at retirement income really through three buckets, and and we sort of break it up from a tax perspective. The traditional bucket, that’s traditional 401ks or IRAs, uh, the Roth bucket, which is generally that’s after tax money, right? And that could be 401ks or Roth um uh IRAs. And then the third bucket is you know a taxable brokerage account type thing, something that’s not tax preferred or tax uh deferred from that standpoint. So coordinating all those three type accounts, and some people have money in each of those three buckets, and that gives you more flexibility. And some people have you know money in two of those buckets or maybe just one of them. But if you do have that you know flexibility from a tax standpoint, um can have a big impact on your tax bill. And again, a good advisor uh certainly can help with with that. And and also, you know, as Brian, you you you mentioned, uh once you hit that that age range of 73 to 75, uh, you know, the IRS requires those required minimum distributions. So if you if you’re planning ahead for that, um you you can also help uh do some savvy planning that can help you manage some future taxes. Now, when somebody retires, um, most of the time, you know, many people will need to start taking withdrawals from those retirement accounts to replace their income, right? After all, that’s the point of saving for retirement. However, some might have other income sources that they can tap into. And again, the point is in those situations, depending on your tax situation, it could make sense to take money out of one of those retirement account buckets before you’re required to, before age 73 or 75, wherever you’re you’re you’re in. Um, and you know, again, I that could be pre prudent, but again, something to work on, think through, and uh, you know, a good advisor can help you work through there. But, you know, the bottom line again on all of these items, Brian, you know, it depends on many factors and of course your specific situation.
Brian Graff: 19:36
Yeah, it really does, Tracy. And again, it goes back to the point that a good advisor is really worth your weight in gold once you retire. You know, it’s just you’ve worked so hard your whole life, you’re ready to go on easy street. Do you really want to be thinking about tax implications? So uh yeah, let somebody who does this for a living and has your best interest in mind really help you out with that. I know that’s my plan for when I uh retire in about uh 15 years or so. Um, but yeah, so as we wrap up today, you know, let’s let’s talk as we always do about some action items. You know, we talked about those three main options within your 401k for when you retire. And remember, those are take a full cash distribution, uh, leave your money in the 401k plan right where it is, or roll it into an IRA or a Roth IRA.
Tracy Burke: 20:22
Yeah. And and again, as you consider those options, you know, the questions that we uh also work through is thinking about the cost, right? What are those costs involved? Um, which option gives me that right investment choices, how I want to you know invest appropriately for my situation? Uh, do I have that right amount of flexibility and control? Uh, does is consolidation an important factor, right? Do I multiple accounts and would that offer more convenience if I do consolidate? Um, and then ultimately that fifth question is again about taxes. How will my choice impact my tax situation? So, as we said several times now, uh, you know, there’s no one size fits all answer for what you do with your 401k winnery tires. And, you know, what matters is just taking the time, planning, thinking through it, understanding your options, weighing those trade-offs, and really choosing that path. You know, we talk about that path uh that Joe took at the beginning uh, you know, in its story, which path aligns with your goals, your tax strategy, and really how you want to manage your money in retirement.
Brian Graff: 21:30
So, Tracy, the last thing I want to mention as we close out for uh for today is if someone is listening to this podcast and they are facing this decision right now, you’re getting ready to retire and you’re still not quite sure what you want to do with your 401ks. Uh, there is a link in the show notes where you can schedule a quick meeting with our team about your 401k, and we can go over all those options with you again and make sure we’re giving you some guidance uh that is pertinent to you and something that aligns with uh you know where you’d like to be in retirement. So, you know, definitely reach out to us regarding that or any other questions you may have related to retirement. Uh you can reach us at podcast at conradseagle.com. We are always here to help. It’s what we love to do. And you know, please feel free to share this podcast with your friends, family members, coworkers. And if you’re so inclined, if you like what you hear, please give us a five-star review. And remember to subscribe if you haven’t already. Take care, everyone.
Intro/Closing: 22:32
Thank you for tuning into today’s show. The Real Talk Retirement Show is created and produced by Conrad Siegel, an advisory firm that specializes in helping people prepare for retirement and beyond. If you want to learn more about our work or meet the team, you can visit conradsegal.com. Information on this show is for educational purposes only and should not be considered personalized investment, tax, or legal advice. Before making decisions, you should consult with the appropriate professionals for advice that is specific to your situation.