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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 all things retirement, including income taxes, Social Security health care, 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. My name is Mike Decker. I'm the author of the book, but I'm also a licensed financial adviser, insurance agent, and tax professional, which means when it comes to finance, we can pretty much talk about it all. Now that said, please remember this is just a show.
Mike:Everything you hear should be considered informational as in not financial advice. If you want financial advice, personalized financial advice, then go to www.yourwealthanalysis.com. You can request your wealth analysis from my team and me today. With me in the show today is mister David Fransen. David, thanks for being here.
David:Well, I'm glad to be here.
Mike:Yeah. Yeah. David's job is gonna be reading your questions that you submitted, and I'm gonna do my best to answer them. You can submit your questions right now by texting us at (913) 363-1234. Again, that number is (913) 363-1234, or you can email them to us at heymike@howtoretireontime.com.
Mike:Let's begin.
David:Hey, Mike. Should I roll over my four zero one k into an IRA or just leave it where it is?
Mike:Yeah. So the immediate answer that most people would assume that would say is, yes. Roll it over. As a general rule, I find four one k's to be restrictive. You've got a certain amount of of money you can work with.
Mike:You know, certain funds are preselected. Some of them are getting more savvy and giving you more options.
David:K.
Mike:But you you wanna be cognizant first off of what are the four zero one k fees. So this is often missed, but if all you can buy is, like, five mutual funds
David:Mhmm.
Mike:Let's say your ETFs in your four one k. That's a bit hyperbolic, but you get the idea. There's limited funds available. And you're paying administrative fees and management fees and all that in your four one k, and you could roll it over and quite simply just buy the same funds but not pay the administrative fees. Why wouldn't you?
Mike:Right. And you could do that on your own. I mean, Schwab, Vanguard, Fidelity, these are great companies. They'd be happy to open account with you. They'd be happy to help you buy those funds.
Mike:Yeah. I mean, you don't need a financial professional to walk you through, okay. Here's the ticker, the fund itself. I want that. Yeah.
Mike:And then buy and just mimic it. It's an efficient way from a fee standpoint to look at your investments.
David:Okay. Yeah.
Mike:You don't wanna pay more fees than you have to. No. If you're being charged a fee, it needs to make sense. So all those people who have left an employer, have old four zero one k's, yeah, kinda cleaning this up is going to help you. Yeah.
Mike:Or could help you, I should say. Now that said, those who want to retire earlier, maybe not.
David:Okay.
Mike:Maybe you keep some or all of your assets in your current four one k, and here's why. It's called the rule of 55.
David:Yeah. Explain that.
Mike:Yeah. Isn't that I love the IRS. They make the best, the rule of 55. Uh-huh. Seventy seven zero two.
Mike:Like, ten thirty one or this Yeah. Okay. So the rule of 55, this one's a little bit easier because it's based on the age 55.
David:Alright.
Mike:And what it says is if you were to separate employment, I'm giving the simple explanation here. Don't do this on your own. Consult with CPA. Consult a financial professional that can walk you through your specific situation. But all things simplified, the rule of 55 says if you're 55 years or older and after 55 years old, you separate from employment, you may be able to take income out of your four one k and not pay that 10% penalty.
David:Alright. Because you pay that penalty all the way up to 59 and a half, I believe.
Mike:On IRA assets.
David:Yeah.
Mike:So if you roll your money out of a four one k to an IRA, you're not getting it back. You're not you're not putting that money back in the four zero one k. That's kind of a that's an irrevocable decision. Mhmm. So the reason why I bring this up is sometimes people will have a lot of money in their four one k.
Mike:They'll roll it all over, but they wanna retire soon. And then they have to kinda work around other rules like 72 t or 72 q of, you know, depending if they bought an annuity or if it's just an attritional IRA. And and you're limited on the withdrawal rates and maybe you bridge the gap with a HELOC trying to live your life. It gets complicated. It's a lot easier if you leave some money in your four zero one k, put it in cash or low risk assets, and use that as your way to bridge the gap between 55 and 60 years old for income.
Mike:Mhmm. And they're just paying your income tax from that standpoint, and then you roll part of it over to to shop other investments. Are you with me so far on that?
David:Yeah.
Mike:K. You wanna keep your options open, and that's one of them. Now the other one is if you have a four zero one k that also has a company stock that you have held for a long, long time. It has a very low basis. If you understand the NUA, the the net unrealized, appreciation of that asset, k?
Mike:You may be able to take that position out of the four zero one k into a nonqualified account. There's a lot of ifs, ands, or buts about this. So don't do this on your own. Work with a tax professional or someone that knows what they're doing with this. But you may able to take that part of your portfolio out, put it into a nonqualified account, pay taxes only on the basis because you haven't realized the gain yet, and then you would sell it at a gain at 15%.
Mike:So think of it this way. If you have million dollars in, I don't know, Microsoft, Amazon, whatever, you know, my Seattle companies that I love and hold dearly.
David:Yes.
Mike:Though, Starbucks can't can't forget Starbucks. But you've got these company stocks, maybe the million dollars. Would you rather basically slowly take it out as income? Maybe you're paying 25% on your effective tax rate, or would you rather go through this NUA kind of strategy, pull it out, and then pay 15% to liquidate it, and then move it elsewhere?
David:Mhmm.
Mike:I mean, that can be a big difference. Yeah. Lot of contingencies here. But, again, that's that's why I say, don't just roll over your four one k and just say, well, this is what everyone's doing when you retire. Consult a financial professional that can also give tax advice.
Mike:One of my favorite questions, in vetting a financial professionals, can you give tax advice? If they say no, move on. Not everyone likes that opinion. I'm probably ruffling some feathers here. Maybe the advisor can't give tax advice, but they work with a CPA.
Mike:I'm fine with teams. Yeah. Teams are great. Like, you help in the back office. Yeah.
Mike:Right? You help with a lot of, like, the health care and all of that. I do. I'm the guy here. That's, so I don't wanna oversimplify this, but I can file your tax returns.
Mike:I can give you financial advice. I can give you tax advice. I so I'm the the what you would call a unicorn in the industry that I'm not restricted like most people would be. Mhmm. Right?
Mike:And for all those listening, by the way, David has a wonderful service here at at Kedrick with the health care, with the Affordable Care Act, people that are looking to bridge their Medicare. Yes. I don't wanna talk down to you, which is we do different things That's
David:true.
Mike:Here at at Kedrick. I appreciate that you're on the show with me.
David:Yeah. All good.
Mike:But my my point being is don't just roll over your four one k. If you got a bunch of four one k's lying around, it may make sense that you're rolling your four one k into your current employer four one k. It may make sense to roll some of them there or some of them to an IRA. There's just a lot of questions that need to be asked before you take that step. That's all the time we've got for the show today.
Mike:If you enjoyed the show, consider subscribing to it wherever you get your podcast. Just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles or if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility. This is not your ordinary financial analysis.
Mike:Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date. Go to www.yourwealthanalysis.com today to learn more and get started.