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Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, healthcare, and more. This show is an extension of the book How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretireontime.com.
This show is intended for those within 10 years of their target retirement date or for those are are currently retired and are concerned about their ability to stay retired.
Welcome to how to retire on time, a show that answers your questions about, well, all things retirement, including income, taxes, Social Security, health care, and more. The show is an extension of the book, How to Retire on Time, which you can grab today on Amazon or by going to www.how to retire on time.com. My name is Mike Decker. I'm the author of the book, How to Retire on Time, but I'm also a licensed financial adviser, insurance agent, and tax professional, which means when it comes to financial topics, we can pretty much discuss whatever's on your mind. Now that said, please remember this is just a show.
Mike:Everything you hear should be considered informational, as in not financial advice. With me in the studio today is my esteemed colleague, mister David Frandsen. David, how are you doing today?
David:I'm well. How are you?
Mike:I'm doing well. Great. This is gonna be a good show. And now just for the newcomers, this is how the show works. David will be reading your questions, and I will do my best to answer them.
Mike:You can send your questions in by either texting them to 913-363-1234. That's 913-363-1234. Or email them to heymike@howtorretireontime.com. Let's begin.
David:Hey, Mike. I am 50 years old. I want to retire at 65, and almost all of my savings, are in my 401k. Is there anything I can do to help prepare for retirement?
Mike:Alright. So, yeah, the 401k is a bit of a debacle because as long as you're with your employer and you are 59 1/2 or younger, you really can't move it. Yeah. It's kinda stuck. Right?
Mike:If you switch jobs, you lose your job, you switch jobs, you don't have to roll a 401 k into another 401 k. You can roll it into a traditional IRA and then manage it yourself or have a professional manage it for you but that's really that's one of the few things that's like okay well there's some limitations here that that need to be addressed And I say that because who knows what the future has? Maybe you are looking for a new job, maybe you're just tired of of your current employer, maybe you're not, but if you're if you're working with the current employer and you want help then the conversation really shapes into how much are you putting into your pretax of your 401 k, how much are you putting into your after tax part of your 401 k if that's available to you? So that's basically the IRA and the Roth of a 401 k. And then how are you allocated?
Mike:People often defer to the target retirement, date but you got to look at the whole picture here what's in your 401 k with outside your 401 k what risk are you okay with I just don't know if many times people are utilizing the resources to really dive into how should my 401 ks be allocated so that's that's the first one is there's a lot of options there that are available to you within your 401 k on how to to optimize it. But then here's the other thing that I think is often missed. If you have, and all people have this, if you have 3 tax buckets, you've got your qualified pretax. Think of it like a traditional IRA. So it grows without capital gains issues.
Mike:Right? It's a qualified account. When you take a distribution out of it, you pay the tax at that point.
David:So because you haven't paid the taxes yet. It's
Mike:It's pretax. Yeah. But it it grows without the capital gains issues.
David:Okay.
Mike:So that's one bucket. Then you've got the after tax qualified account. That's like your Roth. So it grows tax free. There's no capital gains issue.
Mike:But then when you take it out, it's also tax free. So it's nice. Right? You've already paid the taxes as it went in there. And then you have your non qualified account.
Mike:You've already paid taxes on it, but whenever you sell a position, you're gonna pay taxes again. There's no qualification of a retirement benefit. Those are the 3 tax buckets. So in a 401 k, let's say that you change jobs and now you are you're concerned what you want to do with it let's say you roll it over into an ira and now you've got this ira and you're gonna grow great should you just be directionless forget you know go rudderless just let it grow whatever happens happens figure it out later or could you be proactive with it? If you wanna be proactive with it, here's here's what I think it would look like.
Mike:I would rather have and, David, tell me if if you're different. Okay.
Mike:would rather have the most amount of money possible in my after tax qualified account, aka the Roth.
David:Yeah. That makes sense. Because then once you take that distribution, you get that. There's no tax
Mike:There's no tax gross tax free and most people seem to agree with me on this. Yeah. K? Now you can't take it out. There's there's limitations to it.
Mike:You can't take it out, you know, after a certain amount of period of time, so, you know, 5 years. I mean, even that's even complicated too with conversions and contributions and all that. But, basically, let's assume that it's simple for now.
David:Okay.
Mike:So would you rather have that or nonqualified? Nonqualified, I don't like. Trying to grow aggressively a nonqualified account has tax issues. Whether it's long term or short term capital gains, there are tax issues. So I'd rather do the the after tax qualified account, the Roth.
Mike:Yeah. But funding a Roth has limitations. You can only take so much of your non qualified account, like your brokerage account, and contribute to a Roth. So you can only take so much from your non qualified account and contribute to your Roth each year. It's limited.
Mike:They did that on purpose.
David:Yeah. I see what they're doing there.
Mike:But you can take, even before 59 and a half, your pretax qualified account and move as much as you want into your after tax account. You just need to pay the taxes out of your own pocket.
David:Okay.
Mike:So let me let me say all that a little bit differently. If you have a 100,000, let's and I'll use really simple numbers here. Let's say you have a 100,000 in a traditional IRA. You've got a 100,000 in Roth, and you have a 100,000 in nonqualified. So a 100,000 in all three of the buckets.
Mike:K. Why wouldn't you take, let's say, 20,000, 50,000, a certain amount, move 100% of it over to the Roth, so pretax qualified to after tax qualified. K. And then just pay out of your nonqualified a tax inefficient growth bucket
David:Mhmm. And
Mike:just pay the taxes out of that. Sure. You've gotten more money into the after tax qualified account, the Roth, for more growth potential because it's not hindered by capital gains. So it grows tax free. It distributes tax free.
Mike:There was no issue from a funding standpoint because it went from qualified to qualified. K. There are so much you can do for anyone that's 59 and a half and younger there's so much you can do from tax planning with your 401 k once you switch jobs as long as you don't roll it over into another 401 k. And these are just the things that you don't think about because it's like, well, I'm just gonna save and figure it out later. Well, if you do this while you're working, whether you're 30, 40, 50 years old and you're more proactive with the tax planning, it saves a huge amount of heartache, a huge amount of tax potential problems when you retire.
Mike:Too many people are retiring today with almost all of their assets in pretax accounts. And how they understand just the the strategy that I explained right now, it could have saved them a lot of heartache so these these are the things you're 50 years old you want to retire at 65 you've got what 15 years there's a chance that you might switch jobs at that point when you switch jobs consider your options consider the tax planning options that are available to you even in the four zero one ks you can do conversions and there are some people will let you do that I mean just there are just options there but yeah the tax planning is important don't default to just putting everything into your 401 k get the match and then don't think about it These things can make a huge difference. And if you want some help with that, if you wanna understand what your options are, if you wanna understand what you could be doing with your 401 k or traditional IRA or really anything as you prepare for retirement, whether you're 30, 40, 50 years old, even if your retirement's 10 years or more.
Mike:And there's a lot of people in that category. Mhmm. Request Your Wealth Analysis. Just go to www.yourwealthanalysis.com or text analysis to 913-363-1234. That's keyword analysis to 913-363 1234 or www.yourwealthanalysis.com.
Mike:Now that's all the time we have for today. If you want more tips about retirement, income, taxes, social security, health care, and more, make sure you subscribe to this show. Wherever you get your podcast, just search for how to retire on time. Also, you can catch this show via our 24/7 digital broadcast by going to www.retireontimeradio dotcom. You can stream various episodes on your phone while you're on the go, in the car, or wherever you are on a run.
Mike:Just go to www dot retire on time radio dot com. From everyone here at Kedrec Studios, thank you for spending your time, your most precious asset, with us today.