00:00:00
And you mentioned fees and costs and that’s one that people sometimes do get hung up on because there’s a perception that 401ks are free. 401ks are not free. Peter, so good to see you. Welcome back everyone. Today we are talking inservice rollovers at 59 and a half. Is moving your 401k a smarter move? So once you reach 59 and a half, many workplace retirement plans allow what’s called an inservice rollover. But just because you can doesn’t mean you should. So Peter, let’s just break it down first with the
00:00:35
basics. What is an inservice rollover and why does age 59 and a half matter so much? So an inservice rollover or inservice distribution is at age 59 and a half, you can theoretically still be working the inservice part still contributing to the 401k plan. you you keep your job, you keep your 401k, you keep making contributions, you keep capturing company match, but the life savings that you’ve built up over the course of your career until age 59 and a half, you have the opportunity to remove
00:01:13
that and roll it over tax-free, penalty-free to an IRA where you have more ongoing choices, control options, and flexibility and can better prepare prepare yourself for retirement. And the reason age 59 and a half I think is so important. I don’t know how they came up with 59 and a half. I I picture like two senators out on the golf course and one said it should be 59 and the other said 60 and they said, “Well, if I sink this putt, uh, we’ll meet halfway in the middle or something like that.” I I have
00:01:44
no idea 59 and a half becoming so important. But it is that is the age 59 and a half that most people realize you can pull money from your retirement accounts without penalty. But that is also the benchmark, the mile marker that allows you to begin to take control of retirement assets even if you’re not needing them or using them yet. And I I I think that the prevalence of the inservice distribution came about in a series of subsequent market downturns when the employers who formerly did not
00:02:24
have this option watched the life savings of their employees who they are a fiduciary for uh get washed away in large market downturns in the dot bubble and then again in the great recession and then again with the scare of COVID in 2022 um with with no recourse to do anything different outside of the 401k plan and they said well hey maybe holding our employees money captive in this plan that isn’t really built for retirement is not the best thing for our employees who are nearing retirement. So
00:03:01
more and more they are they are implementing this inservice distribution because the the the options inside of the 401k are not meant for retirement. They are meant for growth and accumulation and and even and sometimes especially even those target date funds have more inherent risk and danger than most people realize. And so, you know, as as we get closer to retirement, perhaps it’s better to move the money out of the 401k, keep being aggressive inside the 401k, but only with new money, and take the life savings that
00:03:35
we’ve built up thus far to that point, a better position it for the next phase in retirement. >> So, when does an inservice rollover make sense? And when does staying in the 401k, when is that the better choice? Well, if if you want more choices, options, control, flexibility, if you want to begin to position for guaranteed income, if you want to begin managing your uh your your eventual tax liability, like these are all reasons why uh little tick marks on the pros side for uh and in favor of doing an
00:04:10
inservice distribution. Now, there are a couple things that you need to watch out for. There are some reasons why you may not want to do an inservice distribution. There are are are some companies that offer company stock inside of their 401k plan. This is kind of one of those caveats where the generic advice of you should roll your 401k over uh doesn’t always apply. And this one actually even when you leave a job may be a reason a moment of hesitation that you need to plan specifically around because uh company
00:04:45
stock highly appreciated company stock inside of 401k has some different tax nuances called NUA net unrealized appreciation that you would have to either realize or lose if you rolled it over to an IRA. if you are really planning on continuing to work for a number of years thereafter, maybe that’s a reason to to consider the benefits or disadvantages. Uh but by and large, like there there really >> I don’t think is a compelling case of why not to at least look at and consider the opportunity for an inservice
00:05:20
distribution at 59 and a half. Generally, you can do everything in an IRA that you can inside of a 401k. uh but you can do much much much more inside of the IRA than the limited number of choices and options that are available inside of a 401k. >> So when people are considering whether an inservice rollover makes sense, you suggest looking at investment options like you just mentioned, fees as well, access to advice, what else should we consider? Yeah, I mean the fact that this is not difficult, the fact that you
00:05:52
at 59 and a half can make a withdrawal, not a rollover but a withdrawal and you don’t want to get those things confused. Like you don’t want to do this wrong. You don’t want to make any missteps and you generally want to have the destination for the money set up ready and established before making a rollover. Also for higher income earning individuals uh that are Roth eliminated, I’ve actually seen a case there where if you’re making backdoor Roth contribution then conversions, you might not want to
00:06:29
uh roll that 401k over and then have a large IRA balance. It can cause some complications there. So there are just things to be aware of that are very situational specific that you need to consider. As with any fi financial move, especially large financial moves, and rolling over a 401k where the bulk of people’s life savings has been built and accumulated, that is one of the largest financial decisions that we we we make in our lifetime. Again, it’s not a hard thing to do, Aaron, but it’s one that
00:07:02
you don’t want to get anything wrong on. You want to cross tees, dot eyes, double check, make sure that you’re you’re doing everything right, and weigh the pros and cons because every financial move has a has a little bit of both. >> And so, just to kind of boil that down a little bit further, what are the downsides or risks that people don’t realize when they roll the money out of a 401k while still working, especially when it comes to taxes or protections or plan rules? >> Yeah. Well, I mean I I guess uh there
00:07:34
are certain protections inside of a 401k that you have most of, but maybe not all of inside of an IRA with Orisa and protection from claims of judgments and creditors and litigation and lawsuits and and all those kind of things. Um generally that’s not a large concern for folks. I mean you do have some of those similar protections in inside of an IRA. Uh but taxes, penalties, missteps, um indirect rollover timelines, like all of those things. I I think again I it’s worth mentioning company stock or if you
00:08:12
are a high income earnner and you’re doing backdoor conversion contributions um or contribution conversions rather. I I I think all of those things need to play in. Uh making sure that, you know, double-checking and affirming that you’re you’re making a move that’s not got any surprise taxable implications. Um that you’re not losing any tax advantages. Uh but by and large, all of those kind of things out of the way, generally when you have the ability to take control of your money and move it
00:08:46
from a plan, your 401k, where you are a participant in your company’s plan to your own individual plan inside of an IRA. And again, widening and broadening significantly the choices and options you have to invest in. You don’t have a set menu. You’ve got the full spectrum of the financial world. U taking control of um the the the tax implications, tax planning, being able to position those dollars for retirement purposes and and income and and management. I think all of those benefits generally outweigh um
00:09:25
the the the the slight bit of negative implications of rolling money out of a 401k. And you mentioned fees and costs and that’s one that people sometimes do get hung up on because there’s a perception that 401ks are free. 401ks are not free. >> Absolutely right. >> The the the company that you work for, the financial institution that is holding that plan, they are not nonprofits and they are not taking on the liability of that out of the goodness of their hearts. There’s
00:09:57
generally, you know, higher fees inside of a 401k than most people realize. I’ve heard two and 20, which is a 2% kind of overall and 20 basis points, um, is kind of a round figure for the fees. And there there was a movement a long time ago to have those fees presented, uh, and disclosed fairly readily on 401k statements that really never went anywhere. So, I don’t see those fees disclosed. But digging behind the the the the the scenes and beneath the surface, there are costs associated with
00:10:30
401ks and a lot of people don’t realize that, >> right? No, 401ks are great for several reasons. You know, it’s a really low barrier to entry and like you said, it’s really great for the accumulation phase, but when we get closer to retirement, we’re near that red zone, we have to be more thoughtful about how we’re allocated. So, Peter, if somebody wants to talk through the pros and cons of that inservice rollover or how their 401k or IRA should be adjusted um and invested, what’s the best way to reach
00:10:57
you with questions? >> Yeah, give me a call at Rashan Planning 919-30005886. I have a lot of people ask me about what’s the secret for uh financial success and and investment success. Number one, it is access to the market and number two, it is using and utilizing that access on a regular basis. And I think the 401k actually takes care of those two things very effectively. You got the ability to invest and it happens automatically. That is going to take care of a lot of the barriers for ultimate growth and
00:11:32
building and accumulation of wealth if we just do those things. uh and then it gets into you know picking the right investments and all of that but those are that question is far secondary to having access and utilizing that access and so the 401k is a great tool but then what do we do with the 401k and ultimately what are the results that is a secondary question that comes with specific planning and that’s the kind of plans that we put together at Rashan planning the 401k is great but it does
00:12:01
not address income it does not help us to address market risk or taxation or longevity. It’s not a guaranteed stream of income. It’s not a pension. And so, people of this generation have built up more wealth in 401ks, but have more doubt and worry and uncertainty of what do I do next with this tool to have lasting financial confidence. And again, that’s what we do at Rashan Planning. So, give give me a call. We’ll have a conversation, get a plan put together for you. The optimized your optimized
00:12:30
retirement plan. 919-30005886 919-30005886 or online rashplanning.com it looks like rich onplanning rashanplanning.com >> All right Peter thank you >> thank you Aaron >> hey folks Peter Rashan here with Rashan Planning so glad that you are enjoying the podcast planning matters radio you know one of the tools that we’ve put out there that people really seem to appreciate and really are are finding of value is at 919retire.com. It is your retirement tax bill calculator. If you’ve got any kind of
00:13:15
retirement account, your tax deferred 401k or IRA, this is the website. This is the resource where you can go, you can plug in your own numbers, your information. You can slide the the the tool calculator up and down for your tax rate or your amount of savings and see what your tax bill is likely to be if you default and defer to the IRS’s plan versus what you could potentially bring that tax bill down to. A lot of times it is a very significant savings. So, if you have not yet, go to the website
00:13:47
919retired.com. Run your numbers on the retirement tax bill calculator. >> This has been planning matters radio. >> The content of this radio show is provided forformational purposes only and is not a solicitation or recommendation of any investment strategy. You are encouraged to seek investment, tax, or legal advice from an independent professional adviser. Any investments and/or investment strategies mentioned involve risk, including the possible loss of principal. Advisory services offered through Brooks Zone
00:14:17
Capital Management, a registered investment adviser. Fiduciary duty extends solely to investment advisory advice and does not extend to other activities such as insurance or broker dealer services. Advisory clients are charged a quarterly fee for assets under management, while insurance products pay a commission, which may result in a conflict of interest regarding compensation.
