3 Big 401(k) Updates That Could Impact Your Future

15:37Bo Hanson:Don't sit in courses you've already taken. University of Phoenix accepts eligible transfer credits and has a scholarship for transfer students. Finish your degree faster. Let's talk about big change number three. Now, this is one... I'm not excited about this one. Well, I don't know how I feel because, I mean, it doesn't mean it's bad. It just means that it opens it up for more tomfoolery. And that's alternative investment options in 401ks.

16:04Brian Preston:Yeah, for those of you that don't remember, there was an executive order directed the Department of Labor last year to expand the 401k investment options to now include alternative investments. And I think the way the language is written, it says, hey, we're not going to exclude them anymore. They're not going to be open to where you might potentially see some alternative investments inside 401ks and alternative investments being things that are not traditional stocks, not traditional bonds, not publicly traded entities. And so while it's not a guarantee they're going to be there, there is a good chance that these may start to show up in 401ks.

16:44Brian Preston:And these could be something where dollars inside of retirement funds could begin being allocated.

16:49Bo Hanson:Well, and let me give you my perspective on this is that I'm not against alternative investments. I mean, I've worked for firms where we did this, whether it was setting up syndicates or setting up private ventures and other things. But this was cherry on the Sunday for somebody who's already extremely successful. What I worry about, Beau, is that typical Americans, not necessarily great savers and builders of wealth. And I love that we have this vehicle that makes it automatic for the people. And I also love the fact that more and more with the fiduciary standards and other things that have been put on retirement accounts, you saw the proliferation of more index funds, more things that were low cost, more things that were cut and dry.

17:30Bo Hanson:And these things as the economy, instead of trying to beat the economy, just be the economy because things were getting better and better through innovation. I don't want this alternative investments to be a distraction from people doing the basics, nuts and bolts of, hey, buy the economy, buy the index funds, they're low cost, they're going to do well for you. I don't want you to apple cart turnover and feel like you have to throw those things out just because there's some sexy sizzle that's out there with these alternative investments.

17:58Brian Preston:And so what does this mean practically for you? Well, we just want you to be aware of your allocation. When you're making the choice to defer some of your dollars today and you want to invest them to grow for the future, you ought to know what you're investing in. So make sure when you go into your plans and you select your investment options or you select your target retirement index funds, it's worthwhile just to understand what those are investing in and make sure that aligns with what your dollars ought to be doing and what you want your dollars to be doing. Again, there's more to be seen on this in terms of how it's going to play out and how they're actually going to manifest, but it is something that we want you to be aware of and want you to know is happening inside of your retirement plan.

18:40Bo Hanson:Yeah, let's talk about it because those are the big changes. I think there are some other important, just as a basic education of, there's some other big 401k rules that you ought to understand. First of all, if we're all going to be saving and building up, and this is the first account that's likely to cross into seven figures, well, how to at least know what are the withdrawal rules? How do I even get access to my money as I'm building up these big accounts?

19:01Brian Preston:So retirement assets are built for retirement. And so one of the things that's written into them is if you try to access these dollars and pull them out before you get to a certain age, there's going to be a penalty assessed. So if you want to make a qualified distribution from your retirement account, from your 401k, most times you have to wait until age 59 and a half to be able to pull that money out penalty free. But there is one small caveat. There is something known as the rule of 55, that if you are employed with your employer in the year that you turn 55, you can then access that employer-sponsored retirement account, that 401k, that 403b, before you get to 59 and a half.

19:41Brian Preston:But if you retire and you roll it to an IRA or you don't have assets in your current employer's 401k, you don't get those assets. You cannot get penalty-free access until you get to age 59 and a half.

19:53Bo Hanson:I don't know if we've said it already, but that penalty that we're trying to help you avoid is 10%. That's right. And it's a painful thing. If you think about it, if you're pulling the money out, not only do you have to pay income taxes, but you also, if it's traditional, but then you have to pay a 10 % penalty, you can essentially gut almost half of the value of your asset just by making these withdrawals. So we always just want to make sure people are aware. And the other thing I always, we didn't really bring it up here, but there are carve outs for like first-time home buyers, medical expenses, hardships, and things like that.

20:23Bo Hanson:But just because you can doesn't mean you should. Look, I'm never going get on, if you're in a dark, dark situation and you have to get these assets, I mean, that's a conversation piece, but it's just don't let this be the first account that you're thinking about. This needs to be a break glass to get access. It's not the first place just because you want to put a swimming pool in the backyard.

20:42Brian Preston:Well, and so that's how you access the assets. That's how you would draw the assets. But one of the things you need to know about qualified employer sponsored accounts, 401k specifically, is that there will be a time where even if you don't want to withdraw the money, the government's going to make you start withdrawing your money. And that's known as taking a required minimum distribution. Right now, for folks who hit 73 years of age, the government's going to say, hey, based on your account value at the end of last year, and based on a mortality factor based on your age, we're going to make you, even if you don't want to, pull money out of this account, pay your income tax, and then we don't care what you do with it after that.

21:23Brian Preston:It's something you want to be aware of, especially if you have large pre-tax 401k balances.

21:27Bo Hanson:Yeah, this is one of those things where as financial planners, it is part of our bread and butter because we do such a good job of building up these big retirement accounts that they literally create tax bombs that when we've done Making a Millionaire episodes, we have shown Literally, there's sometimes changes that you're nibbling around the corners of things. These are changes when you pay attention to where your required minimum distributions, what those will look like in retirement if you've been very successful at building retirement assets. Seven figures that you have to be careful.

22:00Brian Preston:You can save you millions of dollars in taxes.

22:01Bo Hanson:You literally will pay millions of dollars more in taxes if you don't structure your account right. So that's why you should definitely be paying attention to required minimum distributions. Even if you're in your 40s or 50s, plan ahead. This is the big stuff we do as financial planners to help clients avoid these huge tax bombs.

22:19Brian Preston:So another thing we want you to recognize is that it's pretty commonplace today that the employer that you start your career with is often not the employer that you end your career with. A lot of times we are changing jobs and we're moving to different companies. And what happens likely, or at least we've seen with clients we work with, is you kind of leave this trail of old 401ks behind from previous jobs. It's not uncommon for someone to come in and we look at their account statements. And before we even see their resume, we can kind of see their work history based on where their old 401ks are.

22:56Brian Preston:So we want you to recognize you do have some options when you change jobs as it relates to your employer-sponsored retirement plan.

23:04Bo Hanson:Look, I'm going to use this as a bully opportunity. Look, I'm a nice guy. I don't bully anybody, but I am a bully when it comes to getting access and using your 401k because I've seen it. I mean, I made that joke earlier. When I think about bad uses of when you change jobs of your old 401k, I've seen swimming pools. I've seen shiny red pickup trucks. I mean, there are lots of things that I've seen. And that's why the stat that breaks my heart is that 41 % of Americans will cash out at least a portion of their 401k when they leave their job. But by the way, when I say a portion of their 401k, you realize 85 % of these people that are in this 41 % take the whole daggum thing, the whole enchilada.

23:50Bo Hanson:And I know it probably, because it seems like it's no different when I have to pick on credit cards. Credit cards seem like they are solving all the problems you have at the moment. Hey, I don't have money right now, but I'd like to buy this thing. And then you have this financial institution that says, hey, I've got this great thing. I've got this bridge of a credit car where you don't have money now, but you might have it in the future. You can use this and it's a tool that will trap you. Well, I feel like the 401k and early access, cause you leave your employment and then they send you a notice and then they probably send you a rollover package or a distribution package saying, Hey, you've got this account that's worth$50 ,000, a hundred thousand dollars.

24:30Bo Hanson:What would you like to do it? And you're like, well, wait a minute. I got kids going to college. I need a new car. I mean, I'm Mark Griswold. I want to put a swimming pool in the backyard. What do you know? This is an answer. No, you need this money for the future. You've spent literally decades building up these assets. Don't let a moment of weakness take this opportunity of letting this money continue to work for you in the long term. So your 50, 60, 70-year-old self looks at you with a thumbs up and then gives you a bear hug for doing things right.

25:02Brian Preston:Yeah, it's a temptation for a lot of folks when you change jobs. This is the first time you even recognize I had the option to get to these dollars. But if you cash them out, not only are you going to pay ordinary income tax, you are, if you're under 59 and a half, going to pay a 10 % penalty. So you're going to wipe out a huge chunk of your army of dollar bills unnecessarily. So let's assume that you're not going to cash it out and you're not going to be one of these 41 % of folks that do that. You do have some options. You can roll the money into an IRA and you can choose where that is. Is it a Fidelity, a Vanguard, a Charles Schwab?

25:36Brian Preston:If you're getting a new job and you have a new employer-sponsored retirement plan, you can roll it into the new 401k. That's totally something you can do. Or number three, you can actually leave it right where it is. There's nothing that says, so long as your 401k is over a certain amount, and it depends on the plan, it's usually either$1 ,000 or$5 ,000. If it's larger than that, there are no rules that say that you have to move it out, that you have to move it somewhere else. So if you work for a Fortune 100 company or used to work and it's a great 401k with great options and great tools that you can utilize, you can leave it there.

26:12Brian Preston:All three of those options, IRA, new 401k, old 401k, are fantastic solutions that would likely be much better than cashing it out. So maybe you're thinking, well, how do I decide? How do I know which one of these makes sense? Don't you worry. We have a resource for it. If you go to moneyguide.com slash resources, we actually have a flow chart that can help you figure out what do I do with my old 401k. If this is true, then do this. If this is not true, then do this. And you can literally follow it through to determine what you should do with your 401k besides cash it out and put a pool in the backyard.

26:49Bo Hanson:I'm going to say this a little differently. Bo just said we had a flow chart. When I hear flow chart, I'm like, what's he going to say next? We got to diagram some sentences? No, no, no. This is a decision matrix. If you want to know, if you've got an old 401k and you've asked yourself, man, what do I do with this? I know I don't want to mess this up. Guys have made this clear. This is a big decision point in my life. Go out there. Moneyguy.com slash resources. You definitely need to check out Got an Old 401k. We will give you the decision matrix that will answer all your questions on this.

27:23Brian Preston:I want to be clear. This is just me and you. You guys take a break real quick. This is me and you talking right now. You said that flow chart wasn't cool, and the cool thing you replaced it with was decision matrix?

27:33Bo Hanson:Well, this is something, yes, because now you're saying, hey, I've got a decision to make. This is going to tell me what to do. This is going to tell me what to do, whereas a flow chart is like, blah, blah, blah. Okay, we can agree to disagree.

27:46Brian Preston:Yeah, I want to fight on this one. All right, so moneyguide.com, moneyguide.com slash resources. Go figure out what to do with your old 401k. Okay, now, another thing that we want you to recognize, and this is something we want you to be in your mind because we've already told you, at some point in your financial journey, you will likely lose control of your tax situation because the government's going to say, hey, sir or ma 'am, you've done such a good job of building your assets. You've done such a good job of saving. You've done such a good job of building wealth that we're going to force you to start taking some of that money out.

28:19Brian Preston:And what if it pushes you into a larger tax bracket? Oh, well. What if you don't need the money? Oh, well. Once you hit that age, 73 currently, you don't get to choose whether or not you pull money out. So one of the things that you might want to consider before you get to that age is are Roth conversions, and all a Roth conversion is is a strategy where you convert some of your pre-tax assets to Roth. Are those something I should be considering before I get to my required distribution age?

28:51Bo Hanson:I think about this all the time is because this is the part we tell everybody, financial, becoming wealthy is relatively simple. But don't mishear me. That's not saying that it's easy. It's just, and that's why we can give you all the free advice. We go to moneyguy.com slash resources. But it is one of those things where I think it's quite interesting is that when you get to retirement, because these tax bombs that get created with these awesome savings opportunities with 401ks and so forth, they not only, when they make you take the required minimum distribution, it impacts your taxability of your Social Security.

29:24Bo Hanson:It impacts the premiums you pay on your Medicare. I mean, this stuff, you start seeing there's a ripple effect, and you just don't know what you don't know because guess what? This is your first and only retirement. Wouldn't it be nice if you had somebody who's done this literally hundreds, if not thousands of times? Well, that's exactly where we come in. We leave the porch light on for you. We work with clients all across the country. As you can tell, we get excited about this because, look, I don't know if it's from my public accounting background or if it's Bo being a nerdy CFA, but we are in the weeds with this stuff, but we're also educators to our core.

29:59Bo Hanson:And if we can help people maximize and kind of navigate these complex situations, we're here for it. And that's why I'd encourage you, if you resemble any of this and you've been successful at building your army of dollars, go check it out, moneyguy.com slash becomeaclient, or just go to moneyguy.com or aboundwealth.com. You'll see, we make it very easy for you to navigate to the Become a Client section. We love for you to give an opportunity. That's why we plant the seeds of knowledge so that you can reach a level of success that you will definitely need us in the future. I'm your host, Brian, joined by Mr.

30:32Bo Hanson:Bo. Money Guy team, out.

30:38Brian Preston:The Money Guy Show is hosted by Brian Presson and Bo Hanson. Brian and Bo are partners with Abound Wealth Management. Abound Wealth Management is a registered investment advisory firm regulated by the Securities and Exchange Commission in accordance and compliance with the securities laws and regulations. Abound Wealth Management does not render or offer to render personalized investment or tax advice through The Money Guy Show. The information provided is for informational purposes only, may not be suitable for all investors, and does not constitute financial, tax, investment, or legal advice.

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