Left a 401(k) at your previous job? Here are your options…

Starting a new job is an exciting time for you and your family and deciding what to do with your 401(k) at your former job most likely isn’t the first thing on your radar.  However, it is important to weigh your options after you leave your job as the savings from your workplace 401(k) plan is most likely your largest retirement vehicle.  There are four options with your 401(k) plan when you leave your job. 

1)       Leave your 401(k) at your previous employer.

In most cases, as long as you have $5,000 saved in your retirement plan you may leave it at your previous employer.  The key is to look at the investment options made available to you are enough to create a diversified portfolio while also keeping your expenses to a bare minimum from the fund choices.  Another important factor is to find out from your human resources department if the plan will start charging you a monthly fee as this can be the common generally after 1 year after leaving the company.  Just like a Traditional IRA, you will be required to take Required Minimum Distributions at the age of 72 after leaving the workplace.  One of the major benefits of keeping the plan at your previous employer is if you retired from your employer before 59 ½ but between the ages of 55-59 ½ as you can take penalty-free withdrawals that would not be available to you with a Rollover IRA until the age of 59 ½. 

2)      Roll over into an IRA

A rollover IRA is a retirement account that you can open at any of the major discount brokerage firms including Vanguard, Schwab, TD Ameritrade, or Fidelity and move the assets from your 401(k) into a Traditional IRA.  Depending on your retirement plan at work, you may be limited to only a select few mutual funds and not eligible to invest in individual stocks or Exchange Traded Funds.  This oftentimes is why rolling over your 401(k) to a Rollover IRA is the best option as you can pick from a wider range of investment options and control your fees by selecting low-cost index funds as well.  The process generally involves a call with the custodian for your 401(K) plan and opening a Rollover IRA to the brokerage firm that you want to move your assets over to.  The retirement plan administrator will then send the rollover check directly to your home or directly to the brokerage firm’s address with the Rollover IRA account number included on the check.  If you decide to rollover your 401(k) to an IRA, make sure to use a trustee-to-trustee transfer (Direct Rollover) in which the check for the 401(k) balance is made payable to the custodian (e.g. TD Ameritrade FBO of John Doe) instead of made directly to you.  The reason for this is you only have 60 days to complete the funding of your IRA from your retirement plan after the check is sent out from your previous employer’s retirement plan if made out to you.

3)      Move to your new employer’s 401(k) plan

Some plans allow you to move your retirement plan from 401(k) to another.  This is not always the case so you will need to check with the human resources department at your new job before completing the process.  Just as it was important to review the investment options and fees of your previous 401(k) plan, it is more so the case when rolling over your 401(k) from your last job to your new job.  The main reason for this is you may have been better off keeping your retirement account at your previous employer or moving the funds to a Rollover IRA.  Once you roll your 401(k) into your new employer’s retirement plan, you are not allowed to move the funds out of the plan until you end employment so it is a very critical decision to make. This is often why it is not recommended to move an old 401(k) to a new 401(k). 

4)      Cash out the 401(k)

Just because this option is made available to you, doesn’t mean that it is a good option.  In fact, if you are under the age of 59 1/2, you will not only pay ordinary income on the amount withdrawn but also a 10% penalty for an early withdrawal.  The one exception for the penalty is if you are between the ages of 55 and 59 ½ and you stopped working at your employer to retire.   After federal and state taxes and a 10% penalty, nearly 40% of the value of a premature withdrawal would be lost in the distribution received.  The only time that you should cash out of the 401(k) is if you do not have any other ways to access funds and that all other resources have been depleted already.  

Whether you decide to keep your 401(k) at your previous employer, rollover into an IRA, move to your new 401(k) plan, or cash out the proceeds ultimately depends on your own personal situation. Each option has its own benefits and disadvantages.  If you have any further questions or concerns or need assistance in making a decision please give our office a call at 678-439-8866 or e-mail me and my firm, Mason Wealth Strategies, at ryan@masonws.com.

Traditional and Roth IRA’s – How they work and why you should contribute to one!

As of 2019, research from the Congressional Research Service, CRS, estimated that only 25.3% of U.S. households owned either a Traditional IRA or Roth IRA.[1]  Also, only 66% of American workers have access to employer-sponsored defined contribution plans based on a study from the U.S. Bureau of Labor Statistics in 2017.[2]  Social Security Benefits alone will not cover your expenses in retirement and maximizing contributions to your retirement plan at work as well as an Individual Retirement Account are essential to meet your retirement income goals.

What’s an IRA and the difference between a Traditional and Roth?

Traditional IRA and Roth IRA’s are both retirement vehicles that allow individuals to save for retirement with different tax advantages.  For 2021, the maximum you can contribute combined is $6,000 if you are under 50 and up to $7,000 if 50 or older.  You must have earned income in order to contribute to either plan.  If one spouse does not work, a spousal IRA can be set-up in their name as long as the amount contributed is within the earned income threshold and contribution limits of $6,000 per a spouse. 

The Traditional IRA

A Traditional IRA provides taxpayers with a current tax break based on your marginal tax rate for the year and defers the income in the account until withdrawals are made in retirement.  Most 401(K) plans are similarly set-up the way that Traditional IRA’s are in that money contributed to the plan is before-tax dollars.   There are no taxes paid on the contributions and the growth of the Traditional IRA until withdrawals are made.  One of the benefits that a Traditional IRA may offer over your retirement plan at work is that you can open the account at any brokerage firm you like- Schwab, Fidelity, Vanguard, etc.  With that comes the flexibility to invest in hundreds of commission-free individual stocks, Exchange Traded Funds (ETF’s), and mutual funds at very low expense ratios while most likely limited to more expensive mutual funds in your 401(K) or employer plan.  This is generally one of the main reasons to invest in an IRA over your retirement at plan at work after contributing the maximum amount to receive the employer match if offered by your plan.  One of the biggest advantages a retirement plan or 401(K) has over an IRA is that you can contribute much more to the account - $19,500 vs $6,000 for IRA’s. 

There are income limitations on deductibility of contributions if you have a retirement plan at work for a Traditional IRA so consult your tax advisor or CPA to find out what your Modified Adjusted Gross Income (MAGI) will be for the year.  If your spouse has a retirement plan but you don’t, you can have a MAGI of $198,000 and still receive the full deductibility and a reduced deductibility up to $208,000.  Please refer to the chart below for more details. 

IRS Traditional IRA Deductibility Chart

One of the major disadvantages of the Traditional IRA vs the Roth IRA is the IRS requires those that reach age 72 to take Required Minimum Distributions (RMD’s) based on a table that you divide the balance of all your IRA’s on December 31st of the previous year from a set distribution number based on your age.  This number increases the percentage you have to withdraw each year you get older from the IRA to pay income taxes on.  Every dollar taken out of your IRA is taxable income as the taxes were deferred to allow the portfolio to grow until making withdrawals in retirement. 

The Roth IRA

Just like the Traditional IRA, the Roth IRA has a contribution limit of earned income of $6,000 for 2021 or $7,000 if you are age 50 or older for catch-up contributions.  You are also able to invest in a wide variety of index funds, Exchange Traded Funds, mutual funds, and individual stocks that are not widely available in an employer retirement plan.  The difference is how the tax treatment works for Roth IRA vs a Traditional IRA.  There are no Required Minimum Distributions on Roth IRA’s as there is for Traditional IRA’s at age 72.  As discussed earlier, contributions to a Traditional IRA are tax-deferred and no income taxes are paid until distributions are made (preferably in retirement or after 59 ½ to avoid penalty).  Roth IRA contributions are made with after-tax dollars.  The growth and income of the Roth IRA are tax-deferred and any withdrawals are tax-free as long as you are over the age 59 ½ and owned the account for at least 5 years.  There are income limitations to be eligible to contribute to a Roth IRA – A modified Adjusted Gross Income of $198,000 for married filing jointly (reduced contribution amount up to $208,000), or $125,000 filing single, head of household or married filing separately.  Thankfully, there is a workaround with a strategy often referred to as the backdoor Roth strategy.  Without going into too much detail, if you earn too much income to contribute to a Roth, you may contribute to a nondeductible IRA and convert it a Roth IRA.  There is a pro-rata rule in that if you have any existing Traditional IRA’s with a balance besides the current year contribution/basis, then you will owe taxes on a percentage of the total balance that was converted.

Conclusion

Whether you contribute to a Traditional IRA or Roth IRA generally depends on your current tax situation and what you think future tax rates will be.  If you are eligible to contribute to one of the Individual Retirement Accounts in addition to your retirement plan at work and have additional savings to invest, it is highly recommended due to the tax favorable treatment they both receive of either deferred taxes or tax-free growth that a non-qualified brokerage account cannot provide.  There are many nuances to retirement and investment planning and you can always reach out to our office at Mason Wealth Strategies by calling 678-439-8866 or our website at www.masonws.com and click “Start Here” to schedule a call or message us on Facebook at Mason Wealth Strategies, LLC | Facebook.

[1] Individual Retirement Account (IRA) Ownership: Data and Policy Issues (fas.org)

[2] Employee Benefits in the United States - March 2017 (bls.gov)

[3] IRS 2021 IRA Deduction Limits for Retirement Plan at work

Image courtesy of Earnest.com

The fiduciary standard and why fee-only financial planning matters?

It is important to understand that not all financial advisors put their client’s well-being before their own. More than half (53%) of respondents surveyed by Financial Engines in 2017 mistakenly believed that all financial advisors are required to be a fiduciaries - the legal responsibility for a financial advisor to act in the best interest of their clients while maintaining the highest standard of care.* Many broker-dealer and commission based advisors follow a much less stringent requirement - called the suitability standard. This means that an advisor is not required to obtain a deep understanding of their client’s current financial status and their goals before selling a product to their client as long as it is deemed “suitable” even if it is not in their best interest.

There are three ways that an advisor can be paid - commission-based, fee-only, or a combination of commissions and fees. A commission-based advisor only gets paid by selling a particular product - a loaded mutual fund (a commission on the purchase of an investment), a permanent life insurance policy, or an annuity while a fee-only advisor charges an hourly or annual fee for services only. It is important that the financial advisor that you choose be a fiduciary as well as a fee-only planner as the conflict of interest are much lower and any that do exist need to be provided to the client. The best way to find out is ask your advisor if they are a fiduciary and if they are not find out why that is the case and how they could possibly be the advisor for you if they do not put your interest before their own. You may also verify with Securities and Exchange Commission (SEC) at www.adviserinfo.sec.gov and search for the firm or individual on the website.

There are many benefits to hiring a fee-only financial planner. In my view, the primary reason to hire a fee-only financial planner is to have an accountability partner to research if you are on the right path to meeting your short-term and long-term goals and coming up with alternative written financial plan to improve upon. More often than not people tell themselves to believe they handle their personal finances and planning on their own, but years often pass and the 529 college savings plan they were going to open up for their child never happens or the Roth IRA they were meaning to fund each year seems to come and go. There are many other benefits including the amount of time that can be saved on managing investments, assisting with cash flows and budgeting, potential tax savings, and making sure that your estate plan is updated and in order.

By putting your clients first and reducing any conflict of interest by providing advice and financial plans, fee-only planners are a great way to assist with investing, retirement, and estate planning. The benefits of having a financial planner are plentiful, but the time, money, and advice that they can save you over time are the most valuable. Not all financial advisors are the same and it is critical to do your own due diligence and interview with at least a few financial advisors to find which one is the best fit for you and your family.

*https://www.businesswire.com/news/home/20170418005420/en/Ninety-Three-Percent-Americans-Financial-Advisors-Fiduciaries-Increasingly