We all want to get our hands on our 401K at retirement, but do we know how to do it the right way? Join us in discussion with financial expert Pam Krueger who has priceless advice to share with our community. Enjoy the show!

 

Margaret Manning:

My guest today is Pam Krueger. Pam is an investing and financial expert. She is an author and a co-host on the PBS show MoneyTrack. Pam has also created an online tool called Wealth Ramp which connects consumers to fiduciary advisors. It’s great to have you here, Pam. Thank you for coming.

Pam Krueger:

Thanks, Margaret. It’s great to be here.

Margaret:

Today’s topic is of great importance to our community. A lot of our women have had really wonderful careers. They have been working for years, putting religiously into their 401K or pension plan. What do they do with that after they retire? What happens to it?

Pam:

First of all, most people don’t have pensions. A pension is where the company you work for is going to pay you for the rest of your life, either a lump sum or some sort of stream of income. It’s different with 401K or 403b, where the money you’ve collected is what you’ve saved through the years.

On average, people stay at any given company for about seven years. So, when you get ready to retire, you have already collected one or more 401K plans along the way. You’ve been contributing to your plan, and hopefully, your employer has also provided some matching contribution.

So, you have all those earnings, and hopefully, the money has been invested in a really diversified portfolio. When you’re ready to plan your retirement, it’s ideal to start thinking about 401K maybe six or even nine months in advance.

At that point, you have only one best option. Even if your company or companies will let you continue to keep your 401K money with them, it’s best to just take the money and do what is called a rollover into an individual retirement account.

Basically, you’re taking all your little nest eggs, or maybe it’s one nest egg, and you’re rolling it over into your own individual retirement account (IRA). But you should be aware that there is a right way to do it, and there is a definite wrong way to do it.

At that pre-retirement stage, your employer will ask you, “Do you want me to write you a check?” You might be tempted to say yes, knowing that it will say $300,000 on it, or whatever the sum you’ve saved up. But your answer must be, “No, don’t write me the check.”

Here’s why. If you touch that check – and I want you to remember this – you will get dinged. There will be a 20% mandatory withdrawal right there.

Also, that will start the clock ticking that you’ve only got 60 days to take that check and deposit it into a brand new individual retirement account that you have to set up at a Fidelity or Schwab or a Bank.

Margaret:

So if you take that money, that $300,000 – whether you put it in the next day into a Fidelity or bank account, or whether you wait for six weeks – you are still going to get dinged 20%?

Pam:

That’s right.

Margaret:

Wow. Do not take the check.

Pam:

Instead of taking the check you want to ask your employer to do a trustee-to-trustee transfer. You have already decided in advance if you want to use Schwab, Fidelity, TD, Scottrade, etc. I recommend you use a very well-known discount broker like Vanguard so you can save on fees.

The IRA is just a basket that’s labeled individual retirement account for retirement purposes. It’s a separate account that you use like an envelope you’re putting money into. And when you roll that money over with a direct transfer or trustee-to-trustee transfer, you are avoiding all the hassles.

You have no 60-day deadline because the transfer happens immediately. But you do want to follow up on it. You want to make sure your employer – who is executing this transaction – is doing it in a timely fashion. And you want to have your account representative notify you when that happens.

Margaret:

I think we should mention that all companies have their own procedures that they follow, including concerning 401Ks and IRAs. Also, your employer may not have your best interest at heart once you’re leaving the company, even if you’ve been in a great relationship for the past 30 years.

Pam:

The important thing you want to avoid is feeling that you’re leaning on anybody. Before you retire you are relying on your company, thinking that they are looking out for your best interest – and hopefully they have, in the sense that they have been providing their own matching contribution of at least 50 cents on every dollar, up to, let’s say, six percent of your income. That’s a nice gift.

The downside of the 401K of companies versus an individual retirement account that you are in charge of, is that even though the company might have your best interest, they also have levels of 401K fees (investment fees, plan administrator fees, etc.) that you’re paying out of your pocket.

The other reason why you want your own individual retirement account is because you want complete control of it. It may sound scary at first, but when you shop around at Vanguard or other discount brokers, you’ll see your fees are going to go way down, and that means more return into your pocket.

After you have made the decision of which broker to use, you have to also decide whether you want to transfer your 401K to a traditional IRA or to a Roth IRA. Additionally, if you’re starting at a new employer, he or she may want to manage that account for you. That’s also a potential option.

However, I would advise you to avoid relying on the employer, even though it might sound tempting. Your best bet is to get up to speed on the basics of the different types of IRA where you are in charge of the investments.

It may sound scarier than it is. It’s really not that complicated. There’s plenty of options to choose from, and they’re easy to understand. So the only thing you need to decide is whether to choose the traditional IRA or the Roth IRA.

Margaret:

Okay, so let’s say you retire and you transfer your 401K money to an IRA. A year later, however, you receive a fantastic job offer that comes with a 401K. So, even though you only plan to work there for the next three to five years, can you have both a 401K with your new employer and an individual retirement account?

Pam:

Absolutely. Think of your 401K money from your former employments as bags of money that need to be kept separate in a retirement account. The whole point of going into either an individual retirement account or a 401K is that you don’t have to pay taxes on your earnings.

If you choose a traditional IRA, the money goes in before taxes, and all that money that you would have paid in taxes gets invested instead and is working for you over the course of time. That is a huge profit.

However, at the end of the ride, when you are ready to start taking the money out of either the 401K or this individual account that you have rolled over into, you have to pay taxes at that point.

Margaret:

You still have to pay at some point.

Pam:

The Roth IRA is the opposite. When the Roth IRA goes in, you have already paid taxes on your earnings. Then, when it comes out, you don’t have to pay taxes. It all depends on when you think you are going to be in the higher tax bracket.

Do you think you are going to be in a higher tax bracket later? Then you definitely want to go with a Roth IRA, because you won’t have to pay taxes later.

Most people think that their tax brackets are going to drop when they get to be in their 60s and 70s. If you make that assumption, you would want to have the lower tax rate when you’re older. In that case, you would opt for the traditional IRA, because you will be paying taxes later.

Margaret:

This is actually very straight forward. At first it sounds like there is a lot to it, but it’s nothing more than making a couple of decision.

Now, if you put all of your 401K into an IRA, could you then decide how to split that up? You may want to have some money go to bonds, some to other things, etc. Once your money is in that account, can you sit down with a financial advisor to sort out what percentage should be in different places?

Pam:

Certainly. You can take the 401K and roll it into the IRA, and you can even keep the investments you already have. You don’t have to sell out of your positions just because you opened the IRA. All you’re doing with the individual retirement account is switching ownership from the company to yourself.

You can do whatever you want with the money at that point. The very first thing I always tell people is to consider the costs. Don’t go directly to an insurance company or a full service brokerage firm. Go instead into a discount brokers firm and keep those costs down.

Then you can decide how you really want to invest the money – and there are plenty of easy plug-and-play portfolios available. Literally, you just press the button, and you have diversified into the right allocations into some stocks, some bonds and cash.

You can pretty much think of it as chocolate, vanilla and strawberry investment. You are not trying to do anything exotic. You are not buying options. You are not going into hedge funds. All that you are trying to do is make that money last for the rest of your life.

But now, instead of your company doing it for you, you are the one running the show with your individual retirement account. I promise you, the choices you have are as easy as plug-and-play.

Margaret:

It sounds really easy when you put it that way. To be honest, I hadn’t saved much before retirement. I’d used up all my 401K as I went along for other things. Thank you for taking the time to explain everything in such detail. Do you think we missed any important points?

Pam:

There are just some key things to remember such as, don’t take that check. Request a trustee-to-trustee transfer and follow up on it because now you’re in charge. It’s all in your hands.

Margaret:

I think women in our community will relate to what you’re saying. To be honest, it does seem kind of scary at first. All of your career you have depended on someone else to hold your hand, but now that you’re 60 it’s all about reinventing the rules.

Pam:

You know, Margaret, there is a lot of information on the topic. It’s really overwhelming. But the reality is as simple as one-two-three.

You need to understand that the money is going to be yours. So, set up the individual retirement account and open it before you make that transition away from work. That way you know where the money is going to go.

You don’t have to worry about investing it yet, just figure out the mechanics of it. Transfer it so that you don’t get dinged or penalized, and so you are not getting any 60-day deadline windows. It takes the pressure off to do the trustee-to-trustee transfer.

Then your only responsibility is to follow up with your brokers firm, Fidelity, Schwab, discount broker, etc., and make sure that the trustee transfer is happening in a timely way. It’s their responsibility to track the transfer for you.

Margaret:

You have given us such great advice. All the information you provided is truly valuable, and I want you to know that we really appreciate your time, Pam. Thank you so much.

 

Do you have a 401K? How informed are you about taking care of your 401K money after retirement? Have you opened an IRA yet? If you have any tips that weren’t covered in the interview, please share them below. Join the conversation!

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