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Do you know the total fees you're paying in your 401k? One study found the average cost per year for a participant was 2.2% of their account balance.
Stay wealthy community. How are you? Thank you as always for tuning in. I've got a great show for you today. It's a topic that comes up just about every week for us. It seems like every phone call or every meeting we have, this question comes up about 401ks and more specifically what to do with these old 401ks.
Really quick, a 401k is just a type of retirement plan offered by your employer. And as you might know, you usually have two options when contributing to a 401k. You've got the traditional option or the Roth option. So when you sign up, you're faced with these two options.
We did a whole podcast episode on this and how to choose traditional or Roth when you're contributing to one of these 401ks. So if you haven't yet, go back and check that out. It's episode 24. You can just go to staywealthysandiego.com slash 24 or pull it up in your podcast app and go find the episode. But we dive into some of the really good details there and talk about what you might think about when choosing traditional or Roth.
Sometimes employers will offer a match for your 401k contributions and sometimes they don't. Either way, I just want to say that you should be taking advantage of this savings vehicle if you aren't already. Sometimes we hear people say, "Oh, my employer doesn't offer a match, so I don't contribute." The match is great. It's icing on the cake, but this is a really good savings vehicle. So make sure you're taking advantage of the 401k offered by your employer, even if they don't match.
So with that out of the way, we've all worked for a company that's offered a 401k that we've participated in. Maybe we've worked for multiple companies that have offered 401ks.
We've changed jobs. We've started a new job. We've started a new 401k. We got busy. We left the old 401k where it was at. And maybe we've done that multiple times. And now you've been working and saving and you're at this point in your life where you've pulled up these 401k balances and you're like, wow, this is real money now. I should probably start taking this seriously and maybe think about consolidating this stuff or is there something more I should be doing?
So that's the question we get is, hey, I've got five old 401ks kind of spread out all over the place. Like what should I be doing with these? Or maybe it's just one. I've got one old 401k sitting at my old employer. What should I be doing with this money or this account? You've probably heard a commercial about IRA rollovers. Maybe you've read something about IRA rollovers and just kind of asked yourself, is that something I should be doing? Does that even pertain to me?
So today we're going to talk about what options you have with these old 401ks, what questions to ask yourself, how to think about how to attack these old 401ks that you might have. And then two, we're going to talk about why you should consider taking advantage of that IRA rollover and rolling over those old 401k assets.
And then three, we're going to talk about why you might just leave those 401ks where they're at and not even touch them. And then lastly, the IRS made some really big changes for 2019. And I just want to make sure everybody knows what those are. We're approaching the end of the year. We're starting to do a lot of planning for next year already. So I just want to make sure everybody's in touch there.
So let's dive into it. You've got three options with an old 401k. The first is you can just leave that 401k where it's at. Now, some plans do have the ability to kick you out. So if you're not an employee there anymore, you've moved on with your life.
Sometimes they have the ability to say, we don't want to keep this plan, this account here anymore. They will, they have the ability to open up an IRA account in your name and go ahead and just put those assets in the IRA. So that could be completely out of your control. It might have already happened. You don't even know it, but some companies do have that ability. So the first option is leave the 401k where it's at. You might get kicked out, but you'll cross that bridge when you get there.
Your second option is you can roll that old 401k or those old 401ks into your current 401k plan. So if you've got a new job right now and they offer a 401k plan, check with your benefits department to see if they allow for rollovers into the plan. And if so, you could
roll those old 401 s into your existing 401 plan. So check with your benefits department before going down that path.
Your third option, and this is the most popular, and we'll talk about why you might consider this in a second, but your third option is to roll those old 401k balances into an IRA. And that IRA could be at a custodian of your choice. So it could be a Fidelity, it could be at Schwab, it could be at Vanguard, it could be at one of the bigger firms that are out there.
The reason we're talking about rolling your old 401 s into an IRA as an option is because if you're contributing to a 401 right now through your employer, you don't have any other options. You have to just keep your money with that employer. You have to keep contributing to that current 401 .
But your old 401ks, you have these options. You have the ability to put it into a new 401k or you have the ability to roll it out and into an IRA. But just remember, if you're contributing to a 401k plan right now with your current employer, you don't have any options. Just keep doing what you're doing.
So really quick, I just want to mention that all of these options we're talking about, they're all identical from a tax perspective. So whether you move from a 401k to another 401k, or you leave your money where it's at, or you roll it into an IRA, the tax consequence is the same, which is there is none. You're just rolling it into a 401k.
a similar type account and you're continuing to defer those taxes. So some people, or there's this misconception that if you roll a 401k into an IRA, that you're going to pay taxes on that rollover. And that's not true. So just understand that from a tax perspective, all these options are the same for the most part. I'm sure there's some certain circumstances where that's not true.
So let's first talk about why most people should probably roll their 401k, their old 401k into one single IRA at a custodian they trust. So we already talked about an example of a custodian would be Fidelity or Schwab or Vanguard or TD Ameritrade. There's a bunch out there, but pick one of those custodians that you trust or where your financial planner holds their investment accounts.
and open up one single IRA for these rollovers. And most people should consider doing this because of a few things. The first is you have more investment options in an IRA. In a 401k account, as you know, if you participate in one, you're limited to a select menu of investments. There might be 10 investment options, there might be 15.
Sometimes we see maybe 20 or 25, but not usually many more than that. And now we don't need a lot of investment options to build a good portfolio. But when there's more options, we've got more to choose from. And usually there's better stuff available. So the one reason why you might consider rolling into an IRA is that you have more investment options available to you. You can shop the market. You can go find lower cost funds.
Which leads me to my next point. Typically, IRA accounts are cheaper than 401ks. The underlying fees in an IRA account, well, you have more flexibility to find investments with lower fees inside of an IRA.
In a 401k, you're stuck with what your employer gives you. So again, you've got this menu of 10 mutual funds to choose from. You don't have any control outside of that. So if there are 10 really high fee garbage mutual funds, then that's what you're stuck with. But if you roll your funds from the 401k into an IRA, now, again, number one, you have more investment options to choose from. The world is your oyster pretty much.
And you can go find those lower cost funds that are going to be available to you at one of those custodians I mentioned. The third reason why you might consider rolling this 401k into an IRA is
Yeah.
And consolidation certainly helps with that when you have five or 10 accounts spread out all over the place at different financial institutions. It's hard to keep track of them. It's hard to keep track of the balances. It's hard to keep track of how they all process their withdrawals and contributions and your bank connections. And it's just a lot to manage. And as your net worth grows and as you get closer to retirement, it's just going to get harder and harder. So consolidating as early as possible.
I think is really valuable. It's something at least I value. It makes my life a lot easier. So having everything all in one place is just really nice, makes it easier from a financial planning standpoint and maybe operationally for you and your family.
But also, as you get closer to retirement and you start to need or want to take withdrawals from your retirement accounts, having them all at one financial institution is going to be really, really helpful for you. If you have 10 different retirement accounts at 10 different financial institutions, you've got to create withdrawal strategies and processes for each one of those. So
you know, sometimes we come across a client later in life and their accounts are all over the place and we've got to work for six months to get all these things consolidated into one place. Otherwise, it's just going to be a total nightmare for them when they, you know, start putting together these withdrawal strategies. So if you can find a,
custodian that you trust today or a financial planner that you trust today to help you start to consolidate all of this into one place and then grow your net worth from there i think you're going to find it just really helpful and really empowering it's just one one less thing for you to worry about so either work to consolidate everything later on in life if that's what you want to do or you can start to tackle that now one quick random fact
Required minimum distributions are never required from a Roth IRA. So that's why people, when we advocate, people get as much money into a Roth IRA as possible because the IRS doesn't have any RMDs. You don't have to take money out of a Roth IRA. So later on in life, it's really powerful.
But if you have a Roth 401k, they do make you start to take those withdrawals and those distributions. So get that 401k at the very least rolled over to a Roth IRA for your traditional retirement assets. Do what you want. Keep them where they're at, whatever's fitting for you. But
Really think long and hard about that Roth 401k if you have one and make sure at least to get that rolled over into a Roth IRA because it's hard to get money into a Roth account. We work our entire careers to fill up that Roth bucket. The last thing we want to do is take money from it if we don't have to. So just something to think about. The fourth reason why you might consider rolling everything into an IRA is
is to get help from your current financial professional, or maybe you're looking to hire a new financial professional and you want their help managing your investments. It can be challenging for a financial professional to manage your investments at a 401k because it's through your employer and they don't really have access to it. They can
help tell you what funds to buy maybe and how much, but they can't execute it for you. They can't keep an eye on it every day. They can't rebalance the account for you. It's really your account with your employer. So it's hard for a financial professional to get involved there. There are some certain circumstances where you can get a financial advisor involved, but it's just trickier. So if you are looking to work with a financial professional, or maybe you already have one, you're like, man, I wish this person could help me manage this bucket of money.
Rolling those assets into an IRA allows more flexibility there. So that could be one important reason for you to consider. Number five, second to last here, charitable giving. For those of you that are charitably inclined, that you're giving money away, the new tax code has made charitable giving less tax advantageous.
However, if you're over 70 and a half, and I know we don't have a lot of listeners over 70 and a half, but if you are, and just something to think about in the future, you can give to a charity tax-free from your IRA through what's called a Qualified Charitable Distribution or a QCD.
If your money is in a 401k at that point, 401ks or employer plans don't allow for these QCDs. So if you're charitably inclined today, you're probably going to be charitably inclined in the future. So starting to consolidate everything into IRAs today will allow you to take advantage of these QCDs. Now, tax laws could certainly change between now and then. So who knows what that looks like, but just something to consider.
Lastly, Roth conversion. So as you get closer to retirement, converting traditional IRA dollars to Roth IRA dollars can be really advantageous when your income drops.
So you're in a really low tax bracket one year. That's the year that you want to do that Roth conversion and pay those taxes because you're in such a low tax bracket. Roth conversions are not for everybody, but they can be a really powerful planning tool. And you can only do them with an IRA. You can't do them with a 401k. So if your money is sitting in a 401k, you're not able to take advantage of this Roth IRA conversion.
All right, so those are most of the reasons why you ought to consider taking those old 401 s and consolidating them all into one place into one single IRA. There's a few more reasons out there, but those are the main ones that you should think about. Let's talk about why you might leave your 401 where it's at inside of a 401 or maybe even consolidate it with your current 401 at your employer.
The first is the cost of an IRA isn't always cheaper. Usually it is, but it's not always cheaper. 401k plans are getting better. Costs are being driven down. If you are, especially if you are in a thrift savings plan, the TSP plan, which is for civil service employees and members of the military, it's a really super low cost plan. And sometimes it's hard to make the case to move it out of the TSP plan.
But the TSP is almost in line these days with other low-cost custodians like Fidelity and Vanguard. So it's a pretty close race at this point, but the TSP is a really good plan. And that might be one reason why you might just go ahead and just leave that where it's at for the time being. This is kind of contradictory to my point about Roth conversions a second ago, but the
When you roll your 401k into an IRA and you have a bunch of money in a traditional IRA, you lose the ability to do backdoor Roth IRA contributions. So I'm not going to go into what a backdoor Roth IRA contribution is.
Let's just say that a backdoor Roth IRA contribution is a really powerful strategy for high earning young professionals, or just high earning professionals in general. Again, I mentioned, we want to
We want to get as much money into that Roth account as possible. And a backdoor Roth is a great little strategy to do that. But if you have a bunch of money in IRA accounts, it can cause some tax problems with this strategy. So sometimes if we're working with the right client, again, that high earning professional that's saving a bunch of money, they want to fill up that Roth bucket.
Sometimes what we end up doing is if they have IRA dollars, we get those IRA dollars back into their 401k. So we do like a reverse rollover to get that money back into a 401k so that we could take advantage of these backdoor Roth contributions. Sometimes it's just not possible. It's too late or the plan doesn't allow for that reverse rollover. So it's just got to work with what we have. But
You might consider keeping your assets in the 401k so you can take advantage of these backdoor Roth contributions if it's fitting for your financial plan and if your CPA signs off on that. Lastly, and this is a touchy one, I'm not an attorney, so get legal counsel before you attempt to do this or take this. Please do not take this as a recommendation. But keeping a
your funds in a 401k supposedly offers federal protection from judgment creditors. So if you live in the state of California and a creditor gets a judgment against you, essentially you get sued, you lose, you owe somebody money, that judgment creditor may be able to collect from your retirement accounts.
In California, some retirement accounts might be protected, check with your attorney, might be protected like 401ks and profit sharing plans. So said another way, according to the article that I'll link to in the show notes, 401ks and profit sharing plans can potentially protect you against judgment creditors.
Other accounts are supposedly more vulnerable to judgment creditors, such as IRAs. So people who are worried about getting sued, having judgments against them, this is a big one for doctors. They like to keep...
a lot of their money inside of 401ks to get this ERISA protection. So do some reading, do some due diligence, check with your attorney. This is not legal advice, but it is something important to consider before just rolling all your money into an IRA. The last one I'll mention is that rolling your money into an IRA
Yes, the fees might be lower. Yes, you might have all these great options available to you, but sometimes you can get yourself into trouble. A couple of things. One, you could get sucked into buying some investments that maybe you shouldn't be buying. Maybe you've got this brand new IRA account at one of these custodians and you just decide you're going to start buying some individual stocks and speculating with your money. Or you get sucked into buying some really high fee mutual funds that you just
didn't really know what you're doing and the brochure looked interesting or you got hit with a pop-up or something and you're just putting your money in places that you probably shouldn't be putting your money. Also, I've seen the reverse where somebody rolls a bunch of money into an IRA and then it just sits there in cash. They don't ever go and do anything with it.
And that can be really damaging too. We call that a cash drag on your total return. So cash just sitting there doing nothing is not helping your investments grow. And these IRA dollars, these 401k dollars, this is not money you're going to touch for a long period of time. So we want to invest it. We want to keep pace with inflation, which actually segues really nicely into what I wanted to talk about next.
which is a few weeks ago, the Internal Revenue Service, the IRS, announced new cost of living adjustments to limits on contributions to retirement plans for 2019. In other words, you can now contribute more money to your retirement accounts each year starting in 2019. So if you're automatically contributing to retirement accounts like 401ks or IRA,
IRAs and you have an automatic contribution strategy set up, number one, thumbs up. Awesome. We definitely want to automate that stuff. But two, you're going to want to go and increase those to make sure you're maxing them out to the new limit. So
The new limit for 401k and 403b contributions starting next year will be $19,000 per year if you're under 50. So it was $18,500. Now it's $19,000. So make sure you make that adjustment and take advantage of that increase.
If you're 50 or older, the catch-up contribution remains at $6,000. So you can make an additional $6,000 contribution. So now total contribution of $25,000.
If you're in defined contribution plans, the total amount that you can now contribute went from $55,000 to $56,000. So there was a $1,000 increase there. If you don't know what I'm talking about, it probably doesn't pertain to you. So don't worry about that. But most people are contributing to 401ks or 403bs and that $19,000 number is what you want to pay attention to.
Our rockstar savers out there are not just contributing to their 401ks, but they're also contributing to IRA accounts. So remember that if you're contributing to your employer 401k,
One of the misconceptions is people think they can't also contribute to an IRA. That's not true. It's partially true, but it's not really true. You can contribute to an IRA. You can always contribute to a traditional IRA. You're just not always going to get the upfront tax deduction. So you want to make sure you're contributing the maximum amount to your 401k account to that $19,000 number.
If you fill up that bucket, you can contribute to a traditional IRA, but it's going to be called what's a non-deductible IRA contribution. So next year, you'll be able to contribute $6,000 per year to a traditional IRA or a Roth IRA. So depending on what fits your tax bracket and what you're able to do, but we would love to see you fill up both of those buckets. So $19,000 to the employer plan and
and then another $6,000 to a traditional IRA. Even if it's non-deductible, a traditional IRA is still a great savings tool. Your money's going to grow tax deferred, compounded over a long period of time. It's going to be really, really beneficial to you.
Lastly, good news. If you're receiving social security benefits, social security beneficiaries will receive their biggest cost of living adjustment in seven years. It's up to 2.8% from last year's benefits. So a nice big increase there.
They're also increasing the full retirement age. It's increasing by two months. So it went from 66 years and six months for people who will turn 62 in 2019. So why all these changes? These changes are known as inflation adjustments. The government changes a number of thresholds based on the rate of inflation every year.
Since inflation has been pretty tame over the last decade, we haven't really seen things like this happen much in the last couple of years. In fact, this marks the first time in six years that the IRS has adjusted IRA contribution limits. So, you know, inflation does eat away at our spending power, but we also get improvements like this where an increase in social security dollars or the ability to save more money, which is great too. So,
Inflation helps set these limits and these benchmarks, but it can also serve as a useful benchmark for your own personal goals and your investment expectations. I know a lot of people like to compare their investment portfolio to the S&P 500 or the NASDAQ or the Dow or maybe a global index.
But really, we're in the camp that the reason we invest our money in the first place is so that inflation doesn't eat it away over a long period of time. We want to invest so that we beat inflation so that our money's worth more in the future.
So we actually think that the best benchmark for you, for your net worth, for your investments, for your portfolio is inflation. And John wrote a really good blog post on why you should consider using inflation as your personal benchmark. And we will link to that in the show notes, which you can always find at staywealthysandiego.com slash podcast and go find the most recent episode and go check it out there.
So I know we talked about a lot today, a lot of numbers, probably said 401k 100 times in this episode, but take care of those old 401k accounts. Don't just let them sit there at least know what they're doing. It's better that they stay put where they're at. That's totally fine. But just have a reason for it. Don't neglect those dollars. You worked hard for him. You save that money. Make sure it's really, really working for you. So hopefully this is helpful as always.
Thank you for listening. If you have any questions, suggestions, feedback, shoot us an email, podcast at staywealthysandiego.com. If you haven't yet, please leave a review. And we look forward to talking with you again in two weeks. Thanks so much. This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services. ♪