401(k) Rollovers

Welcome to Money Talks. I'm your co-host, Tony Shore, and I'm here with our host. Today, we have a very special host, James Baldwin from Summit Financial Consulting is with us. My favorite, you know, the crowd goes wild, James. You actually are my favorite Baldwin brother. I'll take it.

There's a few of them out there. Yeah.

But James, real quick, before we get into it, how long have you been with Summit Financial? How long have you been in the financial industry?

Coming up on five years this October. Wow. Obviously, I'm on the younger side, but we're starting to rack up some experience. Yes.

Well, five years is nothing to sneeze at. And I know that you're really into it. You love helping people with their finances. And you and Ken and the rest of the family there at Summit Financial, the rest of the team, you do a great job. You've helped a lot of people. First, before we jump into it, we're talking about 401(k) rollovers. But how have you been? What's going on over there?

Not too bad. We're over here in southeast Michigan. We're starting to get some warm weather, a lot of rain, but it's warm, so I can't complain too much. So, yeah, just gearing up. Obviously, you're wearing the festive corset, gearing up for the Masters next weekend.

Yeah. The master starts next week. A buddy of mine is going and they sent him this along with his ticket package. Um, a friend of mine and he's like, ah, it doesn't fit me that great. And it's your birthday. I wanted to give this to you. I'm like, what? Uh, yeah. So I'm wearing, I normally don't walk around, you know, promoting Rolex, uh, but I don't have an extra 20, 30 grand for a watch, but, um, uh, yeah, the master's quarter zip. I thought I'd wear it for the show today. And, um, I'm going to wear it again when Ken's hosting just to rub it in just to make sure.

I can't blame you.

Yeah. Yep. So, yeah, I mean, it's going to be fun to give Ken. We got to rib Ken a little bit today before we jump into the topic. Normally, Ken hosts the show and he's off. We don't know what Ken is doing. He's in Florida. Yeah. He's in Florida. I didn't know that there were rehab facilities in Florida. I'm kidding. I'm kidding. Is he on vacation? He's on vacation, right? Yes. He's down there with his family. Oh, that's nice. Enjoying some warm weather. Yeah, that's nice. He's been working hard, so he deserves a vacation. He deserves some time off once in a while. All right. So, James, I'm excited to do the show with you today. We're talking about 401(k) rollovers, right? Yes. Yep. So we're talking about 401(k) rollovers and should you be doing one? Exactly. So talk to us. Where do you want to begin with 401(k)? Most people I know have a 401(k) or a similar. I'm sure a lot of this applies to 403(b)s, 457s, TSBs. So the 401(k) rollover, what do we need to know about that?

Well, I guess we could start with just the definition of what is a 401(k) rollover. Sure. It's kind of how it sounds. Most financial terms are pretty confusing. This is one that actually goes along with how it sounds. It's literally just rolling over your money from one company, most likely a 401(k), to another custodian who's going to manage the money most likely in an IRA.

Okay. Sure. Yeah. And most when you say a 401(k) rollover and most people, when they leave their job or hit a certain amount or reach a certain age, then they usually move money out of their company's 401(k) and into you mentioned an IRA. And that's typically what people do. When do people typically do this and what's the situation? I mean, you're not cashing out your money, right? No, no.

Yeah, there's there's typically four reasons or times when somebody is going to do this. The first one is when they leave a job. So once you leave a job, you usually have free reigns to kind of do what you want with that old 401(k) money. Sure. The second is you're retiring. You're retired there. You're no longer employed at this company. Now you can do what you want with that money. The third one is consolidating old accounts. A lot of time people will work for a number of different companies and they'll have a bunch of different 401(k)s out there. So just consolidating those together. And then the fourth one is when people are looking for more options or lower fees, because a lot of time with 401(k), you're limited on the investment options you have. And then there's fees built into the 401(k)s. And then you're subject to the expense ratios that go with those investments, too. Yeah.

Well, and what's the timing like? You know, when and why are my questions? Why do a 401(k) rollover and when would I want to do that?

Yeah. I mean, for personally, the biggest why is one, consolidating. Again, you have a bunch of those different accounts laying out there. And then two, with a 401(k), you're usually limited on the investment options that you have. Most have about 20, 30, 40. But I've seen plans with as little as four. Like, that's pretty terrible to only have four different investment options.

One of my first one of the when I first I wish I had started contributing to a 401(k) when I first got my first full time job. I did not know. I'm like, I'm not putting money in there. And it wasn't automatic at that point. You weren't automatically enrolled. So I didn't for the first like 10 years I worked and that's bad. I missed out on 10 years of saving. But when I did, the company I was at, they literally had four choices. Oh my gosh. High, medium, high, medium, medium, low, and low. Like low risk and high risk. And low to high, four choices. And you just checked the box. There's nothing, you knew nothing about fees, what's in it. I mean, and most people don't pay, even if there are more choices, they don't really look at these things too closely when they sign up for their 401(k).

Yeah, a lot of times they'll have you take some, you know, short little quiz. What's your age? When do you want to retire? And then it'll throw you into said basket of funds. Yeah. And a lot of people don't look and see how many are in there. And like you just said, four, I've seen it. It's pretty terrible. I'm surprised that companies would even roll out a 401(k) with that little.

I don't know if too many of them do. I think it's gotten better. Like you said, at least you fill out a questionnaire and they get, you know, to your situation and your age. But this was a while back. I'm not a young pup. You know, I just had my 60th birthday. So this was quite a while back. And two different companies I worked for actually had that. In fact, I remember my first company, I didn't sign up, but I think they had three, just high, medium and low risk. And you just checked one. It's like, what? But we've come a ways from that. Hopefully no company is still doing that. But because it's, you know, this is your money. This is, you know, you're saving for the last third of your life typically. I mean, you know, you've got to have enough money to last you about 30 years, sometimes more, 20 to 30 years. So it is important, but there are – I guess people would do a rollover just before they retire or when they retire, right?

Most typically, there are, like I mentioned, other ways you can do it. You can now that you turn 60, once you're over 59 and a half, you have the freedom to roll over that money to an IRA. So there are some other exclusions out there, but most commonly it's when people retire or leave a company.

Yeah, I actually did that. There you go. Good. Actually, you'll get a kick out of this. On the day I turned 59 and a half, and I don't keep track of half birthdays. I'm not five years old. I don't know why the government has that rule, but... You can't take money out or do anything with your 401(k) typically until you're 59 and a half without a penalty, and you shouldn't. But on my 59 and a half birthday, I got a call from my financial advisor. Hey, Tony, you're 59 and a half today. You should think about it. He was on it. And I actually did. I looked at it. And sometimes, you know, the fees are lower in a 401(k) than they might be in an IRA. But you talked about a lot of advantages to an IRA over your 401(k), right?

Yeah. More often than not, you're going to find more advantages. Like you said, sometimes there are some exceptions. Like I said, I've seen plans with over 100 different investment options, which is pretty good. And then I've also seen if you work at a big enough company, because you have all this money with that 401(k) company, they'll waive a lot of the administrative fees that kind of go with those 401(k)s usually. So sometimes that'll bring down fees. So there's definitely some exclusions to where keeping it in the 401(k) can show some benefits too, but more often than not, it's going to make more sense to roll it out.

Yeah, I've only seen it on the fee side where the only real advantage is the fee side. I mean, you still have to keep contributing enough to get the full match. But as far as leaving money in there once you're 59 and a half, you know, or if you leave a company, right, you probably don't want to leave it there.

Yeah, there's usually no sense in it. And a lot of time too, we'll get somebody in here who retires and they'll have three or four of these 401(k)s out there and we'll call X company and say, hey, we want to roll this money out. And they're like, you know what? It's actually a Y company now in the 401(k) move. So then we call Y company. And Y company says, you know, it's actually a Z company. So now you're going on this wild goose chase trying to find your money. I've had that happen. I've had that happen.

I left. I made the mistake of I didn't realize our company got bought out and I didn't realize I had to re-sign up. Uh, so, uh, my 401(k), I didn't fill out the right paperwork. My 401(k) was still at a company that the original company had. It didn't automatically transfer over to the company that bought them out. I was still doing the same job in the same office, uh, but my 401(k), you know, was, and I lost, so for a half a second there, I lost about thirty thousand, twenty five, thirty thousand dollars. Uh, I didn't realize, know where it was, and finally figured that out. But you're right. And I just want to point out to people, your fees can be higher in a 401(k) than an IRA and they can be lower. So you just have to watch out for that. That's one aspect of it. But there are so many advantages, especially if you're working with a financial professional, to having that IRA. And maybe even a Roth. So you have options if you leave a job or are going to you have options right with your 401(k). What are the options?

Yeah, I mean, you can leave it at the old 401(k), but you run into some of those issues we just talked about. You can also move it to your new employer plan. Sometimes people like just to see that money consolidated, combined, and see a bigger amount. It makes them feel a little bit better. So you can move it to your new employer plan. The third common, most common, or the third option most common is rolling it into an IRA. And then the fourth option, typically the worst if you're under 59 and a half, is cash it out because then you're subject to penalties, taxes, not... where you want a load of your money going.

Even if you are over 59 and a half, cashing it out is probably still the worst option because of taxes. And because if you roll it over into another tax deferred account from your tax deferred 401(k), you aren't going to have to pay taxes on that money at that time.

Exactly. You're not going to have to worry about it. And that's actually a very common misconception I get asked all the time of like, hey, if I roll it over, am I going to have to pay a penalty or taxes and I have to pay? No, you don't have to worry about that. We're going to take care of it.

The only time you'd pay a penalty is if you were... under 59 and a half. But if you take the money out, you'd have to pay taxes. Otherwise you don't, if you roll it into a new, either a new, an IRA or a new employer plan. But I, yeah, I, would you say, I mean, in most cases, everybody's situation is different, but James, would you say if somebody is leaving a company and, One of the worst options, cashing it out is the worst, but leaving it at the old company is not advisable, is it?

Yeah, I mean, it's usually not a great option. Obviously, we've touched on it a little bit, too. The money's moving around to other investment companies. You're still paying administrative fees, even though you're not really using the people who work for that 401(k). You're not calling and asking them questions.

You're not working for the company anymore. Why should your money be, right? Exactly. Yeah. Yeah. Okay. So either move it to the new employer or an IRA and moving it into an IRA, would you say that's probably the best option then?

More often than not, it's going to give you more investment options, potentially lower fees. You're going to consolidate. Yeah, it's typically it's a no brainer. Sure.

So my next question is, are there different types of rollovers? I mean, what do we need to know about the rollover itself if you decide to do that or if you recommend someone do that?

Yeah, the best option is going to be a direct rollover. That's when money is going straight from one account to another. You don't have to worry about taxes or penalties or a certain time restraint. Sure. With the indirect rollover, that'd be the other option. You're kind of... I don't want to say gambling, but you're taking a little bit of risk. You're going to receive the money. 20% is automatically going to be withheld. And then you have 60 days from then to deposit it into another retirement account or you're going to be subject to penalties. And tax. If you don't do it within the 60 days, they're going to, well, they already took the money for the taxes.

So yeah, the indirect doesn't sound too good. You know, and if you, they'll cut you a check and then that could get lost I mean, there's so many different problems. You've probably seen people come in and they've done it wrong. They did it indirect.

Yeah, yeah. I've definitely seen that. And again, you have 60 days to do it. As soon as you start that process, the IRS starts their clock. And, you know, say I call a company and, hey, we want this check. It's going to take seven to 10 days to get to you. Yeah. And then you're going to cash it and it's going to take... I don't know, a few more days from the bank to cash it. And then you have to have that other account open and then you have to transfer it over. So if you slip up in any of those steps, you know, that 60 day time limit really becomes kind of an issue.

Yeah. And you've already, I was going to ask you about why people choose an IRA. We've kind of covered it. I mean, you have way more investment options, potentially lower fees. Sometimes they might be a little higher, but it's easier to manage and you can consolidate everything into one place. And then that'll actually give you more diversity, right? Yeah.

Yeah. I mean, it's something we, when people come in, they're like, why should we roll this over? And I'm like, well, your current plan has say 32 different investment options. If you roll it over to an IRA at one of these bigger custodians, you've heard of them, Schwab, Fidelity, et cetera, you have tens of thousands of investment options. What's better, 32 or tens of thousands? Yeah, exactly. Yeah. So just having all those different options at your hand makes it a benefit. And then you can shop out the feeds. Your current plan with those 32 options may have a tech fund in it and you're looking for growth. But what if that tech fund, that one tech fund in there has an expense ratio of 0.8? Well, when I roll it over and have those tens of thousands of options, I can look for another tech ETF with a much lower expense ratio built into it. So you have more options and you could usually find some investments with lower fees too. Sure. So it's really about more control, more options. Yeah. Exactly. You're going to have it in one spot and you're going to be able to do more of what you want with it.

Yeah. And maybe we've touched on some of these, but what are some common mistakes you've seen people make with their 401(k)s?

Yeah. The first is cashing out without realizing that tax hit. A lot of times people will do it through the website and it'll say, how much tax do you want to withhold? Well, obviously, I want to withhold zero. I don't want to pay any tax. So people will just put zero in there. Oops. And yeah. And then when they go to file, they'll get this form from that company showing that they took a distribution and their CPA is going to tell them, hey, you know, you're going to owe money this year because you took this distribution. You didn't with withheld any tax to the inlet.

Right. Right. Yeah, that's interesting. So that's a big one. And you talked about the mistake of doing an indirect rollover. And then we already covered forgetting old accounts. I had that happen. I explained, we figured it out. But yeah, I saw a statistic and I don't remember the exact numbers, but it is amazing the amount of money in the amount of 401 s and retirement accounts that people forget about. And leaves stranded.

And the dollar amount is staggering. The thought just ran through my head. I wonder how much money is sitting out there that has never been claimed or will never be claimed. I'm going to have to look that up after the show because I'm curious to hear what that is.

I think it's billions. Oh, I believe it. Yeah. Yeah. So is there a situation where you'd ever recommend somebody not roll over money out of their 401(k)?

Gosh, it's typically, if that plan, like I said, has at least 100 options in there, if you have a ton of options like that, it may make sense. The other benefit is... is the rule of 55. So if you no longer work at a company and you're over 55, this is a little known thing. People can actually take out that money penalty free. You don't have to wait till you're 59 and a half. You can do 55. So it's another benefit. You can get to your money a little bit earlier. But again, those are rare circumstances. If somebody's planning on an early retirement, that may benefit them.

Yeah. Yeah. So it's not a it's not a one size fits all. Again, I know that you and Ken like to constantly reiterate everybody's situation is different. And you're trying to give educate people through the show, but to really get specific advice based on your situation, your time horizon, etc. your financial situation, your goals to meet, your personal goals, you need to meet with a trusted financial professional like yourself who's going to look at everything, right?

Exactly. And it's something I'll, you know, out with friends or whoever, they'll be like, hey, should I roll over my 401(k)? And I'm like, probably, but, you know, it's going to take us sitting down and going through a few things to know 100% concrete that you should.

Right. Right. And you offer a no charge consultation to meet with people and see where they're at. And then if they want to work from you from there, great. If they don't, no problem. And I love the fact that they can come in and ask you questions. So what about some real life framing here? What do you what do you think?

Well, a quote I heard a few years back when I first started, and it's kind of a good life comparison, is most people aren't making bad decisions. They just haven't made any decisions. So that kind of goes along with the forward pain, leaving it there. You know, hey, I want to lower it over. That's that's that's a good decision. But have we have we made that decision? No, it's it's it's still sitting there. So people put off.

Well, I'm not going to do anything with that right now. I don't want I don't have time. I don't want to think about it. And maybe, you know, it's costing them money. Maybe they're making a costly mistake by not getting it taken care of. You just need a plan in place, a financial plan. Right. That would incorporate these things.

Yeah. And who knows, maybe you started that 401(k) 20 years ago and it was invested in super aggressive and now you're 55 and retired and it's still been sitting there aggressive. You're getting ready to retire. Maybe it shouldn't be invested so aggressively. So that's another thing, too, is you kind of lose track of what you're invested in and where those investments are.

Yeah, yeah, I can see that happening. Well, before we go, is there anything else regarding this you wanna talk about or anything you have to say in closing?

Yeah, I'll just close on this. Before making any moves, understand your options. And then we always say to sit down with a financial professional. If it's not us, that's okay. But sit down with somebody and just make sure it's gonna be the right thing for you and that it fits into your financial plan.

Yeah, I think that's huge. So if our listeners and viewers out there, James, have a question about this or about anything financial or they want to sit down and have that strategy session, I know you're offering a no charge, no obligation consultation. How can they do that? Yeah.

So if you call us at 586-226-2100 or go to our website, summitfc.net, you can book an appointment through either of those avenues and we'll be happy to kind of walk somebody through that process, put a plan together for them and see what makes the most sense and what's going to benefit them.

Excellent. Well, I'll tell you what, James, a lot of great information. You know, I think basically right now what's happening is our listeners and viewers out there saying, Ken, who? I mean, oh, man, I really you really nailed it. I don't know. Ken better be. Ken is probably he's going to see this show and he's going to start sweating. Oh, my God.

I don't quite believe that, but I'll take the compliment.

Yeah, great show today. Great having you on. We'll probably see you some more. We'll have to get Ken to take a few more vacations. But James, thanks. And I know you'll be a guest, at least a guest host on the show coming up. So thanks a lot for today. Listeners and viewers, thanks for tuning in. That does it for today's episode of Money Talks with Summit Financial Consulting, LLC, and our host today, James Baldwin. Thank you for joining us for Money Talks. Don't head into retirement without a strategy that addresses both income and taxes. For more information, please contact Ken Wink at Summit Financial, working with people you trust. Call 586-226-2100 or visit SummitFC.net. Join us again soon for another episode of Money Talks.