How To Control Your 401K With An In-Service Rollover | The Retirement Income Show | Retirement at 60’s and Your 401k

 

Welcome back to the retirement income show with Troy Sharpe, a certified financial planner, but also, of course, the CEO and founder of Oak Harvest Financial Group, located in 920 Memorial City, way right off I-10 and Bunker Hill. You can always go to the website to find out more.

OakHarvestFG.com. You can certainly search for the over 100 videos Troy has on his YouTube channel, just search for Troy Sharpe and Oak Harvest. You subscribe, but there’s no subscription fee. And you can watch any of those videos you would like to, to learn more about your retirement.

If you would like, YouTube search for Troy Sharpe and Oak Harvest. We’re talking about preparing for retirement today in the accumulation phase our working years versus the distribution years when we’re retired are two totally different phases of life.

And you said the light bulb moment, Troy, is once somebody is in retirement for like a year. They’re like, holy cow. There’s a lot more moving parts here than I thought. I thought I would just, you know, wake up in the morning, read the paper, have a cup of coffee, and then go do what I’m going to
do without all these other question marks that I’ve got in my head. Once I retired, because I didn’t know there was so much going on. One of the things that I think is really interesting, because I’m not a financial guy, so I love listening to you every week on this program and chatting with you about retirement.

But I’m a 401K retirement person, which most are. Today’s retirees probably are now in the 401K 402b, 457. Not all of us lucky anymore, like our grandparents, to have a pension when we’re retired. The inservice rollover of a 401K to me, seems to be one of the I don’t know.

It seems to me to be make a lot of sense once you get 59 1/2 to roll that 401K into your own IRA to have more control over it. Am I overstating the importance of that or is that something that is actually important?

Well, everyone’s situation is different, of course. And for a lot of people, yes, that does make sense to take advantage of that inservice rollover. And for those who don’t know, an in-service rollover is the IRS says once you hit 59 1/2, you are allowed to rollover your full 401k, hire a financial advisor and enroll it
into an IRA. And that allows you to start to have a plan, have that investment plan, working with the income plan, developing a tax plan, et cetera. Ultimately, it gives you control of that 401k prior to fifty nine and a half.

There are certain parts, certain moneys that you have. It’s a little bit complex, but your 401k provider can give you this number that is allowed to be rolled over. Not your entire 401k, though, prior to 59 1/2.

But your employer has to allow it, whether you’re pre 59 1/2 or post 50 1/2. So the IRS are simply says, yes, after 59 1/2, you can roll that 401K over to your individual account, individual IRA, and you can manage the money however you want.

But what I want to do with this segment is, if not anything else, I want to provide perspective. I feel like I’ve lived through my 60s, my 70s, my 80s, thousands and thousands of times. And of course, there are things that I’ve learned that I would not have learned until I got
to my 60s and 70s and 80s. So one of the things we’re able to do is to provide that perspective, not just here on the retirement income show, but to individual people that we sit with and of course, clients that have been with us for for a very long time.

That gives us the perspective to help prepare better for retirement. And if you’re 30, 40, 50, if you’re leading up to that retirement age, you of course, you don’t have that perspective. You’re very good at what you do in your job.

But you almost certainly have not put together thousands of retirement plans. You’ve not seen those plans come to fruition over time. You’ve not dealt with the changes to to all the aspects of retirement that impact those previously laid plans and then had to make adjustments.

And then, of course, you haven’t seen when things go wrong or when goals change. So one of the things that we do too much, I think, is that we spend a lot of time talking about what to do once you get to retirement.

So I want to provide that perspective. What do we do prior to retirement? So the first place I want to start is where are you saving your money? You really have a few choices. Conventional wisdom is you sock as much into your 401k as possible.

You get your company match, you put it into the pretax part of your 401K. So what that means is you’re creating a tax deduction today. Well, what is your income? Because right now, if you make around $100,000 of joint income, your effective tax rate is around about 10 percent.

So do you need that tax deduction today? Let’s say you have a million dollars in your 401K. You’re making one hundred and twenty five thousand a year and you have your existing deductions as part of your overall plan.

Whatever the deductions that are coming out of your paycheck already that aren’t subject to taxable income and your 401K contribution. Well, maybe it makes sense for you to pay that 10 percent effective tax rate on that income and start to put money into the Roth part of your 401K.

Many of you have what’s called a Roth 401K option, where you can put money into that. It will grow tax free. There are no limitations as far as how much income you earn. You’re still subject to the annual contribution limits that you are in your traditional 401k part.

But if if you’re not making $250,000, $300,000, even if you’re making $350,000. The effective tax rate there is probably around about 20 percent. Everyone’s situation is different. You could have various deductions. You could itemize. If you’re over 65, you have an extra deduction.

As far as taking the standard deduction, everyone’s situation is unique, but, President Trump, what he did was not only lower the tax rates, we all are aware of that. But what he also did as part of his tax legislation was widen the tax brackets.

Now we have an upcoming tax change in this country. I don’t know what President Biden’s going to do as far as the changes to the tax brackets and the tax rates for people that make less than a million dollars.

There’s a lot of bluster out there. We do have, we’re starting to get some concrete information as far as negotiations go. But truth of the matter is here, they’re going to have to get some Republican support here because they’re putting the spending bill, one of the spending bills here through the reconciliation
process, so they can only do that once per budget cycle. So if they want to get the tax bill passed this year, they’re going to have to have 60 votes in the Senate. And that means they’re going to have to get Republicans on board.

So some of the tax changes probably won’t be as stiff as they would have been otherwise. But the infrastructure bill, I couldn’t think of the name of it. They’re going to ram that through the reconciliation process with no support from Republicans.

So that means Republicans will be in on the tax bill. So hopefully there are no changes to the widening of the tax brackets and also the current rates for those people making 100, 200, 300 thousand dollars a year.

That’s combined family income and of course, less than that as well. So it’s where you’re saving dollars. Are you saving under the pretax part? Are you saving it into the Roth part? You could also be saving it if you have excess income beyond those contribution limits.

Most of you aren’t aware that you can put additional savings into the after tax part of your 401K. So it’s up to around fifty four fifty five fifty six thousand somewhere in that range on the on the total amount of money that you can put into your 401K.

You can only put up to about 26, 27 thousand into either the pretax or the Roth, depending on your age. But you can put additional moneys inside your 401k. It’s just they can’t go into the Roth, they can’t go into the pretax part.

They have to go into what’s called the aftertax part. So check with your 401K provider, your H.R. department, whomever handles the 401K paperwork and can give you answers to these questions. But the benefit of putting it into the after tax part of your 401K is that those dollars, yes, you pay tax on them today.

But once you retire, sever from service and you roll that 401k over, you can take those after tax contributions and you can roll them directly into a Roth IRA. So the IRS excuse me, the IRS had a revenue rolling back in, I believe it was 2014.

I’m not quite sure on that. The revenue ruling, I believe, was 2014. Dasch 54. But don’t hold me to that. That said, you can very clearly now parse out your after tax contributions and the interest on those contributions and you can roll the after tax part that you’ve contributed to a Roth IRA and the interest on those
contributions.

It has to go to the IRA whenever you retire. But if you’re able to put another $200,000 let’s say, into the 401K over a six, seven, eight year period prior to retirement, and you max out the deductible or the Roth part, and you’re able to put more into the after tax part upon retirement, those
dollars will roll into a Roth IRA.

Those contributions, 1-800-822-6434. Oak Harvest Financial Group, visit the YouTube channel. We’re going to talk more about preparing for retirement and then providing some perspective of what it looks like once you get into retirement.
1-800-822-6434 So stay with us. There’s a lot more to get to with Troy Sharpe, the CEO and founder of Oak Harvest Financial Group. This is the retirement income show.