Do you have old retirement accounts from previous employers?

Are you resigning from a job soon?

Over time, peoples retirement accounts become like the hall closet. It started out nice and organized, and over time became messy. To be honest, you’re not entirely sure what’s in there anymore!

On top of a busy life, it can be difficult to manage where everything is at, the different investment strategies, and how everything works together.

Knowing what you can do with your accounts is important – and knowing how to avoid pitfalls and potential tax bombs is vital!

If you have old retirement accounts or will be changing jobs soon, this video is for you.

Show Notes:

• Can you rollover a 401(k) to a Roth IRA?
• Indirect rollover

Full transcript:

SPEAKERS

Anthony Saffer & Alex Okugawa

Alex Okugawa 0:00
The great resignation… more people are leaving their jobs at record paces for something new. Today we’re discussing what you should do with your retirement account when you leave your job and things to watch out for to avoid a tax bomb. Stay tuned.

Hey there, it’s Alex and Anthony at One Degree Advisors. Today, we’re discussing what you should do with your retirement plan when you leave your old job. If you enjoy today’s video, please like and subscribe for more. So Anthony is the great resignation. People are changing jobs at record paces. I think a lot of this has to do with if folks are working remotely more, they have a lot more options and flexibility. The labor market is just kind of out of whack. But regardless of whether or not people make changes or not, they need to make sure they’re making the right decision with their retirement accounts.

Anthony Saffer 0:50
Yeah, that’s right. So knowing your options is step number one, but just as equally important is avoiding those tax pitfalls that can come with each option. Yeah,

Alex Okugawa 0:57
Yeah, so really, what we’re gonna do here is we’re gonna break it down into four main points, four main options that people have. And the first option with their old retirement account is to just leave it where it’s at.

Anthony Saffer 1:07
Yeah, and this is not ideal, because when you leave a job, you’re not staying up to speed on what’s happening with that particular employer’s plan. Things can tend to get organ disorganized over time, if the plan makes a change, you may not be aware of it.

Alex Okugawa 1:22
I mean, I’m working with a client right now who’s done a fantastic job saving, she’s a disciplined saver, she has her finances really under control. But she also has like four different retirement accounts, she has two old 401k is from old employers, he has two separate IRA accounts. So she’s done a great job saving, it’s just it’s really hard to manage. There are things all over the place, it’s difficult to track, so you can leave it where it’s at, it just becomes a lot more difficult. On the surface, the second option here is to simply cash out the plan.

Anthony Saffer 1:52
Yeah, and this is often a big mistake, right? Because then you end up paying taxes, potential penalties for early withdrawal. And then the other thing is that when people use it as a windfall, they leave a job, they take the money out, you get further down the road in life, and you don’t have the money. They’re what it’s intended for, which is for retirement,

Alex Okugawa 2:08
Yeah, you want that compounding to work for you, not work against you. All right, the third option here is you could move it into your new 401k. Assuming you get a new job pretty quickly.

Anthony Saffer 2:18
If the new plan allows it a rollover in and most do, this certainly can be an option. You just have to be happy with the plan. So you’re going into that particular company, getting comfortable with that plan, knowing what the options are the different features of the plan, does it works for you? And is it the best option?

Alex Okugawa 2:34
Yeah, and not only what are the current options, but a lot of 401 K plans, I mean, they’re changing options all the time. So you have to move funds around. If they change plan administrators, you’ll be changing plans as well. So you’re, you’re caught you’re, you’re less than the driver’s seat, right, if you will, in that situation. All right, the last option here is to either move into an IRA or a Roth IRA.

Anthony Saffer 2:54
And most people choose this because it does give that person control of their own retirement money within an IRA, they can control the investments, you’re not subject to a list, you can control costs. If other financial strategies such as a Roth conversion come up, then you can easily implement that on your own.

Alex Okugawa 3:12
Although this is our preferred method of doing things, you have to make sure you do it right. Otherwise, you really can create a big tax bomb for yourself.

Anthony Saffer 3:19
Now one term that you want to pay attention to is doing a direct rollover, this most often makes sense, as opposed to an indirect rollover, which is where an indirect rollover is when you take the money. So the employer pays you out, they have to withhold 20% on an indirect rollover, after taxes.

Alex Okugawa 3:37
There’s no getting around that they must withhold 20% federal tax if they’re going to send a check directly mailed out to your name.

Anthony Saffer 3:43
Then you have to roll it over yourself within 60 days. So there’s an important deadline that’s there. And with that tax that’s withheld, you have to make it up on your own. So if you have a million-dollar 401k, they withhold $200,000. And you go to roll back that million dollars, well, you’ll remember you only have 800,000, because they’ve already withheld so you with 200,000. Right. So the simple way to overcome this is to do a direct rollover, where it goes directly from the employer plan to the financial institution, the custodian that’s managing the IRA, and then you don’t have to mess with that withholding.

Alex Okugawa 4:15
Again, lots of people changing jobs, they have retirement plans flying around again, going over the four main options here, you can leave it where it’s at, you can cash it out, maybe not ideal, you can move it into a new 401k or you can move it into an IRA or Roth IRA. whatever choice you make, we just have to make sure it’s the right choice for you and make sure that you don’t create a tax problem for yourself. And now let us know what you think. What have you done with your old retirement plan? And why? Let us know in the comments below. And if you enjoyed today’s video, please like and subscribe for more. Thanks for watching.

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This does not constitute an investment recommendation. Investing involves risk. Past performance is no guarantee of future results. Consult your financial advisor for what is appropriate for you. Disclosures: https://onedegreeadvisors.com/solutions/#disclosures