Hosted by Kevin J. Zywna, CFP® and Allison K. Dubreuil, CFP®
Allison Dubreuil, Wealthway Financial Advisors: Tonight, I wanted to talk about something that affects a lot of people and probably more and more these days as people seem to be leaving their jobs. Very often these days, I think I saw a statistic that the average Baby Boomer has worked for six different employers over the course of their career and many 20 somethings, I think we saw, made major shifts during COVID. There was upheaval in jobs and the work environment. This created an opportunity for people to make changes. So we want to talk about the 401K. When you switch jobs, what do you do with your company sponsored retirement plan your 401 K or 403 B or your TSP?
What To Do With Your 401K When Switching Jobs?
Kevin Zywna, Wealthway Financial Advisors: A lot of times when people don’t stay at jobs very often, then they don’t build up much of anything in their company retirement plan. They might not treat it too seriously. When there’s only a couple 1000 bucks in there. And so they go on to the next job. They stay there for a couple years only get a couple 1000 in the retirement plan and they go on to the next job and so on and so forth. And so they accumulate these small buckets of retirement plan money that just languish behind with old employers.
The problem is the old employers don’t want these accounts on their books. Each account cost them some money. Typically for any amount below $5,000, the employer (after certain amount of time, if you haven’t done anything, if you haven’t taken the initiative to move that money on your own), then the employer will do it for you. Kick the money out of the plan and either send you a check (a distribution from the plan) – which in most cases is going to make it fully taxable to you and penalties might apply. Or they will automatically roll it over into another company that puts it into an individual IRA in your name. But as we have seen in practice in the past, those companies that specialize in these abandoned orphaned small dollar 401 K plans, they fee these accounts to death. So it’s basically just a way of letting the company’s getting rid of it. It’s not in your best interest. You should do something, take some action with your old retirement plans.
Allison Dubreuil, Wealthway Financial Advisors: Yes, forgotten retirement accounts can really cost you time and money. It’s really important as you make a job change to make sure you don’t leave your 401K money behind. I was reading some statistics that really surprised me. I was reading that 33% of workers in their 20s opt to cash out their 401 K’s when they leave their job. And like you said it’s probably a small amount. But it added up to $92 billion that left 401K systems due to cash outs. I think that was back in 2015. $92 billion in 401K cash out.
Kevin Zywna, Wealthway Financial Advisors: 1/3 of all workers in their 20s cash out their company retirement plan, pay the taxes, pay the penalties, take whatever’s left, put it in their bank account, spend it. We’re going to come back to that statistic because that is very surprising. Right now we have a caller on the line. Thomas, in Chesapeake, you are on Dollars & Common Sense. Thanks for your call.
Are There Benefits To Putting Property Into A Trust?
Caller: Thank you, sir.
Kevin Zywna, Wealthway Financial Advisors: How can we help?
Caller: My question is I’m a retired military guy 100% disabled, and I’m looking at rolling my house into an estate plan with my wife. And I was wondering, do you lose the property tax benefit from being 100% by rolling it into a trust?
Allison Dubreuil, Wealthway Financial Advisors: Good question. Because of your disability status, you don’t have to pay property tax on your primary residence. Right?
Caller: That’s correct.
Allison Dubreuil, Wealthway Financial Advisors: And who owns the property right now?
Caller: My wife and I jointly. Yes, we got a mortgage.
Allison Dubreuil, Wealthway Financial Advisors: Okay. And you’re considering moving it into a trust? You said?
Caller: Yes. For the eventuality of death. I know that when I die, that benefit continues on with my wife because she was my spouse. I just had a loss in the family. The family home was in a trust and there’s a lot of benefits to it. And I was wondering if I lose that benefit by putting my house into a trust?
Kevin Zywna, Wealthway Financial Advisors: Well, Thomas, let me ask you, what do you see as the benefit of putting the house in a trust? What do you hope to gain by doing that?
Caller: From what I understand there’s a good tax break. Or when we pass, it’s not overly taxed with the death tax. I guess we’ll just alleviate a lot of the probate requirements. I’m really not well versed in estate planning.
Kevin Zywna, Wealthway Financial Advisors
Okay, well, the first thing you said: tax benefits, no, there are no special tax benefits by moving your house from joint ownership into the ownership of a trust. Yes, the second part, yes, there are estate benefits – ease of administration with a trust and not having to put it through probate. But there should be some real compelling reason here to want to put the house in a trust. Ease of estate administration is one. But it also can be fairly easily managed in other ways.
Caller: Okay. I was just told by the realtor that I’m dealing with the family property, it made things just so much simpler after death of the owners.
Kevin Zywna, Wealthway Financial Advisors: But if you’re concerned about your wife, she’s already an owner. So there’d be no specific advantage there. Now, if you are going to leave it to your kids or heirs. There may be.
Caller: Well, the plan is, I’m not trying to monopolize your show, but the plan is my wife and I, we both have three sets of kids blended family.
Kevin Zywna, Wealthway Financial Advisors: Okay. All right, that that changes things, that can be a good reason.
Caller: And what we’re looking at is, you know, like, if I pass first, you know, I want her to be able to live in the house. And, you know, if she decides to remarry, you know, more power to her, but I don’t want the house to become at that point. Oh, well, now, he has a voice.
Kevin Zywna, Wealthway Financial Advisors: Okay, that makes more sense. Okay.
Allison Dubreuil, Wealthway Financial Advisors: Well, then back to your original question, Thomas. I would recommend consulting an attorney to be certain. My inclination is though, that the trust would likely be a revocable living trust, which does offer some of those protections you were talking about and can help you accomplish those planning objectives. But it is still something that you and your wife, if you’re both the trustees, would control and then I believe the VA would treat that as you still own the property and that you still would be exempt from paying taxes. So that’s how I think they would treat it but I would defer to an attorney that specializes in estate planning.
Caller: Okay, fantastic.
Kevin Zywna, Wealthway Financial Advisors: Okay, Thomas, thanks for the question. That was a good one. A lot of complexity here. We appreciate it.
Don’t Cash Out Your 401K Early
Allison Dubreuil, Wealthway Financial Advisors: Tonight, we’re talking about what to do when you change jobs. What should you do with your 401K? There’s definitely a cost of time and money if you leave behind old retirement plans. And if you are not paying attention to them or actively managing them, you are certainly letting opportunities slip through your fingers.
Kevin Zywna, Wealthway Financial Advisors: Yes, so Alison threw out a stat early on, that we came across. About 1/3 of workers in their 20s opt to cash out their 401K plans. This from a report from Vanguard, by the way, so pretty reliable source. 1/3 of workers in their 20s cash out their 401K plan. That got me. That’s a huge number, by the way, a massively huge number. And that’s a lot of people doing the absolutely wrong thing at the wrong time. Barring a catastrophic financial emergency, you should not be cashing out your company retirement plan. That should be an option of last resort.
One fundamental tenant, the main fundamental tenant of good, successful investing is having time on your side. Time is a depreciating asset for all of us. And so when you are young, and in your 20s, you have a lot of time on your side. That is not absolutely the not the right time to be cashing out your company retirement plans, if you can at all avoid it. 1/3 of people doing it in their 20s.
Roughly 2/3rds Of Americans Contribute To A 401K Plan
That got me going down a rabbit hole. So I did a Google search for what percentage of the population in general contributes to a retirement plan? Well, the answer to that, according to a study at the Federal Reserve Bank of New York, is about 65%. So only about 65% of people who are eligible for a company retirement plan, and I should clarify, they focused on 401K plans. But 401K plans function much like 457s, DSPs, and 403B’s, at least in this regard. So I would imagine that numbers are consistent. So only about two thirds of the population contributes to a plan.
1/3 Of Americans Cash Out Their 401K Prematurely
Then we have about 1/3 of those people who are cashing out their 401K plan in their 20s. And, this is the thing that gets me so frustrated, is that there’s so much opportunity. We say it at the beginning of every show – that the majority of people in this country have the opportunity for financial security, if they choose it. These numbers are not good. Two thirds of the population taking advantage. But then 1/3, cashing out at the most inopportune time and then having to start over. This is not a recipe for good financial health for most people.
And this is how most people conduct their financial affairs. Certainly those who do not work with a financial advisor, you want to be a do it yourself, or you think you’re saving money, that’s fine. Go ahead. It’s your money you can do with it, whatever you want. But then one day, you wake up at 65 and realize that all you’ve got is Social Security, and not a whole lot else. When you get into the workforce, most people are 18-20 years old, you have about 40-45 years of work and savings to get you to a place of financial security. But if you don’t take the opportunity, or you misuse the opportunity through no one’s fault but your own. I get really frustrated when I hear people at 65 say, I had a lifetime ahead of me and I didn’t take the opportunity when I had it. So that’s my little rant for today. And I’ll try to back off of that and get back to the stats and the facts. But, you know, it’s just highlighted so many times in industry literature, how wide swaths of the population continue to do the wrong thing at the wrong time for the wrong reason. And then they wonder why they don’t have enough money.
Allison Dubreuil, Wealthway Financial Advisors: All right, so we’ve established that when you leave a company, you should not just cash in your 401K.
Can We Predict How Long The Bear Market Will Last?
Kevin Zywna, Wealthway Financial Advisors: Joe, from Norfolk. We see you up there.
Caller: Thanks for taking my call. Kevin and Alison.
Kevin Zywna, Wealthway Financial Advisors: You’re welcome.
Caller: So I’m a late baby boomer, at 62. I don’t plan on retiring until after 70. But I’m just curious. You guys sound a lot younger than I am. My 401K has taken a pretty big beating just like everybody else’s in the country. Is there a rule of thumb in eight years, it will be back to normal or back up? I know we’ve been through quite a few of these over the years. I’ve been through quite a few of them. I’m just curious if there’s a timeline? Is eight years going to get me back to where I should be?
Kevin Zywna, Wealthway Financial Advisors: Well, we don’t know exactly where you should be Joe. But I think I know the question that you’re asking. Yes, there are definitely some metrics. So let me put this in context. We are currently technically sitting in a bear market, as measured by the S&P 500. A bear market is considered at least a 20% decline from peak to trough. In any particular given index, one of the most widely followed is the S&P 500. So we are right around that 20% mark, right now. In our world, these are normal, these are natural. They happen with a frequency that is anywhere between on average five to seven years. Once every five to seven years. The average bear market decline is around 36 to 38%. And the average time it takes for recovery in a bear market? Now it depends on how you measure that. But I’ll say give you about a year to a year and a half. So you said you’re 62. You’re still working. You’re not looking to retire at about 70. You’re still earning income. I assume you still contributing to your 401K plan?
Caller: Yes, absolutely. Whenever it gets like it is now I invest more.
Kevin Zywna, Wealthway Financial Advisors: Well look at you! You’re answering your own question. What should you do in the in these times to set yourself up? To help yourself manage through them and set yourself up for success? That’s exactly what you do. First of all, you don’t stop contributing. You continue contributing to your 401K plan or your TSP or your your portfolio, your brokerage account. And if you can, then you try to increase the amount you’re doing that because this is, the trite expression of buy low sell high stocks. It’s so easy, anyone can do it. Well, everyone – that sounds really great until we go through a bear market. Then the news and the headlines, and the whole world seems to be on fire. Then people are afraid to buy low. And not only that, they stop contributing, or they do the worst thing possible. They sell out because I can’t take the pain anymore because I can’t see it go down anymore. So I sell out of my investment. Then you lock in your losses. And when the eventual recovery comes, you’re not invested to take advantage of it. That’s how you lose real money. That’s how people end up doing it wrong. So good to hear, Joe, that you have a good attitude about it and you’re doing the right thing.
Caller: Well, I hear a lot of people going oh, I’m going to buy gold and I’m going to do this and I’m going to do that. I’m like, Look, man, just put more money in your 401K. I was losing it. But like I said, I’ve been through it enough times. So in four or five years you’d probably be back to normal because like I said, I’m not planning on retiring, and I may not even retire at 70 because I’m in the position, I don’t have to. I’ve always been worried over the years that I’m going to have to retire, and the market’s going to be in the dirt.
Kevin Zywna, Wealthway Financial Advisors: That’s where the financial planning comes into play. Because once you go from the accumulation phase to the distribution phase, it gets real. That’s when you’re going to live off of your nest egg, live off your investment account. And you have to have backup plans in place for when another bear market hits. And keep in mind, retirement is not the end. It’s just a transition period. And if you have normal life expectancy, you probably have almost another third of life ahead of you. That’s still a long time horizon. We still recommend that, at least our clients, stay invested for growth.
Caller: All right, well, I appreciate it. I appreciate your opinion. So I’ll look forward to it going back up one day.
Ready To Start Planning For Life?
Best Way To Help Kids Learn To Save
Kevin Zywna, Wealthway Financial Advisors: Now we are off to Virginia Beach to speak with Brian. Good evening, Brian, you’re on Dollars & Common Sense.
Caller: Hi, Allison and Kevin, thanks for taking my call. So my quick question was, I wanted to be able to start my kids off as early as I could. And I looked up setting up a custodial account and opening up a Roth IRA in their name. Somebody I know said there are some restrictions and rules that go along with that in terms of record keeping. And things like that has to be earned income from what I understand. And I just didn’t know if you guys have any kind of simple ways of trying to funnel even small increments of money as much as I can to get them started off and and get them a better footing than say I had started out.
Allison Dubreuil, Wealthway Financial Advisors: Good question. Brian. How old are your kids?
Caller: One just turned 10. The other ones 7.
Allison Dubreuil, Wealthway Financial Advisors: Ten and seven? And do they have a job? Do they mow lawns?
Kevin Zywna, Wealthway Financial Advisors: Paper route? Rake leaves?
Caller: They do those. They do help out around the house. They help out the grandparents, things like that. They do some volunteering, work with their school, things like that. But of course no W-2 income.
Allison Dubreuil, Wealthway Financial Advisors: Well, you are supposed to have earned income that is reported on a W-2. For parents that own their own businesses and can actually quote unquote, “hire” their kids. Give them little jobs and pay W-2 income, that’s one creative way to start helping your children be able to defer income. But they might have to wait a few years until they actually get some formal earned income.
Kevin Zywna, Wealthway Financial Advisors: Yes, but at that time, you definitely could open up an IRA. We would typically recommend a Roth IRA at a young age to contribute up to the amount of that earned income or up to $6,000. If they were to make that much money. Most kids don’t. If you just get a summer job, that type of thing. So that’s something that they could earn the money, and you could contribute the money into the Roth IRA. So that’s something that can help them out, too.
Allison Dubreuil, Wealthway Financial Advisors: Yes. One idea is, obviously once they have earned income, if they can put a little bit aside, maybe you match, you know, whatever they save and put into their Roth, you match it. And so that kind of doubles their savings rate just to get them in the habit. And if they did that, as soon as they started working, they would be so far ahead of the game. If they start early and just continued to do just a Roth IRA for their entire life, they would be very well with it.
Kevin Zywna, Wealthway Financial Advisors: You’ve got the right thought there, Brian, but you’ve got a few years before you even have to worry about starting and they’ll still get a good jump on most people.
Allison Dubreuil, Wealthway Financial Advisors: I mean, in the meantime, you could do just a simple brokerage account, I guess, if they really were earning money with the little neighborhood jobs or their grandparents and you wanted to teach them about it – saving. Really, it could just be a savings account, I would say.
Kevin Zywna, Wealthway Financial Advisors: Yes, that’s probably one of the best places to start. Because given their ages, it’s probably going to have to be a custodial account anyway. If you have it in their name, which means (if you don’t change the ownership), it would revert to them at age 18. And then they can do with it what they want. Just getting them in the savings habit. Even if you start with a piggy bank. You get an allowance, you get 10 bucks, right? One goes to charity, two goes to the bank and seven is there to spend. That’s good savings habits.
Caller: Gotcha. Okay. Okay. Well, I appreciate the info. And I’ll ease up and give them a couple more years before I go that direction and start with a bank account. That’d be good.
Kevin Zywna, Wealthway Financial Advisors: All right, Brian, thanks for the call. It was a good one. Appreciate it.
Don’t Leave 401Ks From Past Job Alone
Allison Dubreuil, Wealthway Financial Advisors: Tonight we’re talking about what to do with your 401K when you leave a job. If you are like the average American, you will probably switch jobs some six different times throughout your career. And so you may end up with six different retirement plans or various pots of money out there. And the risk in just leaving everything scattered around is that it can certainly be overlooked, lost. You can lose track of it. It can be forgotten about and not tended to properly and it can complicate things once you start to transition into retirement and you’re starting to spend from your accounts or you’re subject to annual required minimum distributions.
Roll 401K Plans Into New Employer Plans
Kevin Zywna, Wealthway Financial Advisors: Yes, there’s rarely a good reason to leave behind old company retirement plans at old employers. You should at least transfer them to your current employer. If your current employers plan accepts them or roll them over into an IRA in your name that you control.
Allison Dubreuil, Wealthway Financial Advisors: So there’s four options we’ve already covered, cash it in is an option. And if you were here in the first half of the show, you know never to do so.
Kevin Zywna, Wealthway Financial Advisors: That’s a bad option. It’s the option of last resort.
Allison Dubreuil, Wealthway Financial Advisors: The other option is if your plan allows to leave it where it is. But again, these things don’t tend to be managed well, if left where they are. And also there are fees even though a lot of people aren’t aware at all about the fees that they’re paying through their 401K plan. Many people think that they aren’t paying fees in their 401K plan at all. So know that if you’re leaving it where it is, you are almost certainly paying for that. And you may not be maximizing your investment opportunities.
Allison Dubreuil, Wealthway Financial Advisors: Kevin mentioned, the other option is to move it from your old employer to your new employer’s plan, if your new employer accepts those rollovers. That’s a good way to consolidate it. Keep it all in one consolidated account that you can pay attention to and you can manage. But typically, with 401K plans, you have very limited investment options. So I’d say average 10, maybe 20 fund options, most of them are targeted.
Kevin Zywna, Wealthway Financial Advisors: That’s what we typically see.
Allison Dubreuil, Wealthway Financial Advisors: And they’re very limited. So know that if you’re leaving the money in the 401K, or consolidating it into a 401K, you’re going to be limited to whatever your new employer allows you to invest in. And you will be subjected to those types of fees as well, even if you’re not exactly seeing what the fee is.
Kevin Zywna, Wealthway Financial Advisors: I don’t want to get into the whole 401K underground, but there are a lot of embedded fees in 401K plans that the employees have almost no say over and the employer has all the say over. Most employees, while it’s always disclosed somewhere in the fine print somewhere, what these are, it’s very hard to decipher, but just know that it isn’t free. For most companies, there are some companies that foot the whole bill for 401K plans, but those tend to be the exception.
Move 401K From Past Employer Into An IRA
Allison Dubreuil, Wealthway Financial Advisors: Then the final option is to move it out of your old 401K and into an individual retirement account or an IRA. That could be a traditional IRA or a Roth IRA, if you have Roth IRA money in your 401K. That you can self manage or that can be managed by a financial advisor.
And this will typically open up a whole host of investment opportunities or options for you. It can oftentimes be lower costs, or in the case of working with an advisor will hopefully provide you with much more value with investment guidance and comprehensive financial planning around your investments.
Rules Of Moving Money From A 401K To An IRA
Now, if you’re going to do this, you need to understand the rules of moving money from a 401K into an IRA, because you can run into trouble. And we’ve certainly had people that have run into trouble trying to move money from one to the other. Because if it’s not done properly, it’s considered a distribution, which is a big no-no. And then you’ve got 10% penalties, and you’ve got taxes all at the ordinary income tax level. So ideally, the money should never touch your hands, it should go from 401K company A to IRA Company B and you never touch the money. That is a non-taxable event. But if they do need to send a check to you, you need to make sure that it gets deposited, the whole amount that comes out of the 401K gets deposited into the IRA and not a penny difference.
Allison Dubreuil, Wealthway Financial Advisors: There are some time frames. If the money is hitting your hands or the check is made payable to you, it has to get back into the IRA within 60 days. So just get help from your custodian or your 401K plan administrator, if you’re attempting to make this move, or hopefully you’re working with a financial advisor who can help.
Kevin Zywna, Wealthway Financial Advisors: Ideally, that check – if it has to hit your hands, is in also the name of the receiving IRA that it’s going to ultimately be deposited into. You also don’t want any withholding to come out of that if you’re going to do a direct rollover because there’s complexity around that, too. So just know that while it can be done, to rollover your funds from 403B’s 457s, IRAs, TSP into an IRA. It just needs to be done carefully and properly. Because if it’s not, then there will be a surprise tax bill the following year.
Kevin Zywna, Wealthway Financial Advisors: Who has experience in doing this and can guide you through the process.
401K Mistake Wrap-Up
Allison Dubreuil, Wealthway Financial Advisors: But in general, consolidating wherever, whenever possible is our preference. It helps eliminate gaps, redundancies, additional fees, and can make sure that your entire financial plan is working in concert.
Kevin Zywna, Wealthway Financial Advisors: It simplifies your life, it’s easier to manage from an investment standpoint. If you do your own investment management, then it’s much easier to have it all in one pot than trying to coordinate five different pots of money. So there’s just like I said earlier, there’s rarely a good reason to leave money behind at an old company’s retirement plan.
Allison Dubreuil, Wealthway Financial Advisors: And don’t cash it out. To get that in there one more time, right? Even if it’s a little amount, you know, it all adds up. I think that’s probably why that happens.
Kevin Zywna, Wealthway Financial Advisors: That’s what people say, right? Well, it’s only $10,000. And I need a new car. So easy. Okay, well, you know what, that $10,000 would be 40 years into the future? Maybe $500,000. So that’s why you don’t cash it out. Retirement plans are for retirement use them for that purpose. Just because you can cash it out, doesn’t mean you should.
Kevin J. Zywna, CFP®
Allison K. Dubreuil, CFP®
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