What You Need To Know About IRA & 401(k) Withdrawals & Rollovers

Today’s Wisdom:

Should you do a 401(k) rollover to an IRA? What happens to your retirement accounts when you hit the magical age of 70 ½? How and when you withdraw money from your accounts makes an enormous difference to the overall success of your financial plan. On today’s podcast, Joel will walk us through some of the most common questions revolving around some of retirement’s most ubiquitous retirement accounts.

What You’ll Learn:

[0:51] – Contributing To A 401(k) Is The Easy Part

  • Things get complicated when you withdraw money from IRAs, 401(k)’s, TSPs, etc…
  • The way you withdraw money can have a profound impact on how much money you keep, live on, pay the IRS or pass on to the people you love.
  • Without a strategy, you can trigger higher taxes.

[2:43] – Why Is The Age 70 ½ An Important Age?

  • The IRS forces you to start taking money out of your retirement accounts.
  • This is an important age because it needs to be planned for.
  • The reality is that you lose some control and flexibility of your retirement money.

[4:27] – What Happens If You Don’t WANT To Withdraw The Funds?

  • Joel shares a story about a meeting with a client’s son coming to the realization of how big a chunk taxes were going to take out of his income.
  • Retirement accounts like IRAs and 401(k)’s give you tax breaks throughout life. That’s why eventually the IRS wants those dollars back.

[6:32] – The Required Distributions Are Not Required On All Accounts

  • It only applies to qualified retirement accounts (403bs, 401(k)’s, etc…) and IRAs.
  • This does not apply to Roth IRAs or the Roth portion of a 401(k). Life insurance plans that are designed for tax-free future income are also exempt from the mandatory withdrawals. Certain annuities are also a part of this exception.

[8:17] – What Happens If You Have Multiple Accounts At 70 ½

  • The IRS doesn’t care which accounts you take your money out of. They just tell you the total amount you need to withdraw.

[9:53] – Can You Lessen The Tax Burden The Withdrawals Create?

  • Not really. Unless you do it ahead of time with some advanced tax planning strategies. But if you wait until you’re taking the withdrawals, your options are a bit more limited.
  • The key is to be proactive before you hit that magical age.

[11:34] – Rolling A 401(k) Into An IRA

  • There are certain reasons you might want to stay in a 401(k).
  • But most people find several benefits to rollover to an IRA. They gain access to more investment options, get better control over the account and can also get more effective professional advice.
  • Some people will see a drop in fees going from a 401(k) to an IRA (or vice versa), but that doesn’t tell the whole story in every situation.
  • As with most things, it’s a pros vs. cons kind of conversation.

[14:27] – Common Rollover Reason: High Cost Investments

  • A lot of large companies have gotten better at reducing their fees due to multiple lawsuits. Sometimes smaller companies will have higher fees.

[15:14] – Common Rollover Reason: The Financial Junk Drawer

  • Many people accumulate multiple 401(k)’s as they bounce between different jobs.
  • This can lead to more complicated planning because of so many various accounts of differing amounts. That’s why many find it beneficial to roll into an IRA where it’s simpler to track.

[16:44] – Common Rollover Reason: Need More Bond Funds

  • A lot of 401(k)’s lack in their access to bond funds. For some people, this is a big reason to do a rollover.

[17:34] – Common Rollover Reason: More Withdrawal Flexibility

  • Some 401(k)’s limit how many trades or withdrawals you can make.

[18:24] – Warning: Don’t Implement A Rollover Without A Review

  • It won’t make sense in every situation.
  • Understand all of the pros & cons and how a rollover fits into your overall situation before pulling the trigger on an action like this.

Final Thoughts:

“The truth is some people are going to pay through the nose in taxes when they withdraw money from their IRA and 401(k). But a smart, savvy few will legally pay far less. Which one will you be?”

– Joel Johnson, Money Wisdom Podcast

Additional Resources:

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