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2023.03.05 01:00 Wrong_Temperature_15 DOUGH: 401K Deep Dive, Part 3 — Abrahams Wallet
Do you have any social justice messages you'd like to share or ‑‑? You know what? I want to dedicate this win to all of the ducks that died during the Exxon Valdez spill. I'll never forget their pain. So I want everyone who didn't win this award to feel guilty.Read more: https://opentheo.com/i/7250795400066721241/dough-401k-deep-dive-part-3
Thank you. What's up, boss? This is Abrahams Wallet. We span the gap between the austerity of obedience to God and the prosperity rising from faithfulness.
Run your home and your doe like a biblical boss. [Music] So what's happening in your world? I think last time I talked about an asset we were speculating on, we closed on that deal today. Oh, man! That's pretty exciting.
That's fantastic. So give me three dream uses of this property in your mind. Well, we're going to do what we, I'd say, is our number one dream use tonight.
The number one night that we have keys, we're just going to bring some ‑‑ You don't have to go into great detail on what would be your dream use of your property that you're going to go to with your wife tonight on the night that you closed. No, no. Stop that.
We're not staying the night, Steven. Oh, you're not staying the night. Well, there's no furniture.
It's getting painted and carpeted. Oh, exciting. We are going to Shabbat there tonight, which I think that was one of our thoughts of having a place near the house that's within about an hour and a half, is that we can go up on a Friday night and come back if we need to for kids event or something like that on a Saturday.
So that's number one. I think we'll use it as a family for Shabbat. It's right next to our favorite ski resort.
So we'll ski there in the winter, on the weekends, stuff like that. Number two is it's just going to be delightful to us to share it with folks. We did a podcast a few weeks ago where you were in someone's vacation lake property.
That's true. And I have always thought, man, I think I'll get as much joy out of sharing something like this as I will out of living in something like this. So looking forward to that.
And number three, I don't know if I'm allowed to say this because I don't, I haven't cleared it with you, but I have a dream that someday clients of ours would use this space as an option if they're going to do a vision and goals retreat, which is something, something that we walk all our clients through. I've thought, you know, we asked them to DIY some pieces of that, but how cool would it be if we got, you know, an old crusty patriarch and his son and his son all in the same room and we're able to plan through. Now, what does this family vision look like for the next 300 years, not just for the next 20? And is there a little mother-in-law suite tucked away above the garage where a podcast host can stay to facilitate these important conversations that people are having? There's plenty of room for that type of thing.
Oh, okay. Excellent. Well, that sounds wonderful.
So it's a mountain. It's skiing during the winter and it's what during the summer? It's lake during the summer. Oh, man.
So we don't own a boat, but we have a paddleboard now. I wouldn't be surprised if the boat is in your future somewhere. Yeah, we were talking about that today.
I have friends that have been very generous with their boats for us and the recommendation I've gotten is by the beaterist oldest junker, you can find that runs and learn how to properly operate a boat before you go spend any sort of serious money on a boat. So that's my plan. It's just something that I'm sure I'll drop it off the trailer or something a few times.
It'd be nice to have that be a small mistake instead of a life altering one. Yeah, I'd like to talk about pickleball. Okay.
Now, pickleball is the fastest growing sport in these United States. Very popular with the fastest diminishing group in the United States, which is the elderly. Now that's a ready joke for you.
I understand that, but it's also true that in the last, I'm going to get this stat right in the last five years, they say, I don't know how they track such things, that the average age player age has decreased 10 or 12 years in the last five years. Because the way the sport is growing is not with the geriatric, it's with the young. So I was with...
So there's 60 year olds playing pickleball now. This is what you're saying. I get it.
I understand what you're saying. I was with my hair stylist friend in a former life. I owned a hair salon and hired this sharp girl to be a stylist.
She is now on her own. She owns a place and she's my hair stylist now. I was with her just hours ago.
And she brought up the fact that her husband, so this is... He's going to be 35 at most. No, he's probably not 35.
It's probably 32. And she's just like, this guy is devoted to pickleball. She's like...
He was given a pickleball shirt for his birthday. Please don't ask me what a pickleball shirt is. I don't know.
I don't know. But what I have found, I have a little group of buddies who once a week we go out. One of them has a country club membership.
And so the rest of us glom on as guests to his country club membership. And we played pickleball at the country club weekly. We enjoy this, but it's limited.
I'll confess that when I am in a sporty groove, I don't like to stop. I was always disappointed to me when the pickup basketball games would end and everyone would go their separate ways. I'd be like, "I'm warmed up.
Let's keep going. This is how I feel about pickleball these days." But I have found nearby me a pickleball, what I'm referring to as the pickleball honeypot. I have found a place where every day from 7.30 in the morning until noon, there are six courts packed with people.
Are they older in general? Yeah, they're older. Are they bad at pickleball? No, they're not. They're good at it.
And it's fun and I'm loving it. And the sport is growing. And if I could invest in pickleball, if there was an pickleball fund, I would invest.
It's a rising tide. I'm excited about it. Well, you need to, I'll put you in contact with my father who put a deal in front of me the other week where he was considering investing in a pickleball empire that is an indoor pickleball place.
It's franchising. He had the opportunity. Maybe you could also invest in that.
There is an outfit in Oklahoma called Chicken and Pickles. And they basically sell, if you think of a big local brewery where they have a big play area and it's supposed to be a big family kind of a scene, that's chicken and pickles, but it's pickleball courts and chicken sandwiches and picnic tables. And I'm sure there's a lot of astroturf if it's the kind of Oklahoma that I know of.
Anyhow, pickleball. I'm glad you enjoy it. Yeah.
I also, you and I played pickleball for the first time of my life. Yes. Playing pickleball.
And I put it in the category of foosball and ping pong of things that I actually think are really fun. I would definitely do it. Is ball.
I don't, I don't have any ill will towards it. I just feel like, well, this isn't tennis. You know, so you're right.
It's superior to tennis and just about every way. Wow. Okay.
I was going to say we had a delightful family experience last weekend and it involved finances. It was that my 11 year old daughter participated in something that happens downtown once a year and it's called the city flea. So it's a flea market where people can bring their own stuff, bring your own craft, get a booth, whatever, sell cookies.
And once a year, they have the kid city flea. And so my daughter found out about this last year and for a full year, she has been dreaming of when she would participate in the kid city flea. And for the last three months, I'd say she has been sewing, sewing, sewing her scrunchies.
She's been making bracelets. She makes earrings and something else that I can't recall at this moment. And she put up a booth and we looked at the finances for it and how much she would have to sell and what her stuff should be priced at and where her profit margins would be.
And we put on, we put on a little family, I don't know, it was like a family business workshop at the city flea. That's awesome. And sorry, that was that was leading somewhere.
So I thought it might be interesting to interview her as the day went so that we could hear what was her experience being a little entrepreneur kid for the first time and any sort of real way where the stakes were higher than mom and dad buys lemon aid stand stuff for you and then you get to keep the change that you earned off. So all right, I'm gonna roll a couple of clips so we can hear Joy talking about her experience as an 11 year old selling crafts. Sweet.
What are those bells mean? Eight o'clock. Eight o'clock in the morning. Right.
You were up before sunrise. Yes. What are you doing today? Setting up and doing the city flea.
What do you mean doing the city flea? I'm selling scrunchies, earrings and bracelets at the city flea in Washington Park downtown. Oh wow. Cincinnati.
And have you, did you just like wake up this morning and look all this stuff is done? No, I've been working on it for a long time. How long? Like well I've mostly been working on it for like a month but I've been working a lot on it for the past couple of days. And kind of a year are you kind of starting things out? Yeah.
Why did you get interested in selling stuff? Well because I have an Etsy shop and I love making stuff like this and you can like sell it and I love doing crafts and so I can sell them. And Lenora and Charlotte did the city flea last year. Oh, your buddies? Yes.
And so it's fun and so I can do it this year now too. What if you do the math, what does it say that you might could earn today? Like with paying mom? Let's say that you pay back all of your material costs. You pay for the stall, rental, you know, you need to buy a place to sell your stuff, all of your costs.
What might you clear today? Like two hundred and thirty dollars. Whoa. You ever made two hundred dollars in a day before? No.
Kind of exciting. Yeah. Why do you think that, why do you think that you can just do something like this? Just make a little business and make your own stuff and sell it.
What makes you think you can pull that off? Well, I just like to do it and my parents do it. Oh, your mom, your mom has a business, right? Your dad has a business? Yeah. So you think I could do one too? Mm-hmm.
Well, awesome. We'll check in on you later today and see how it's going. Okay.
So Joy, your stand has been open for two hours right now and what just happened? What did you just sell? I just sold another bracelet and then your mom told you, your mom's keeping books for you back here and she said that was very significant sale. Why? Because I just broke even with my debt of all the supplies that cost me to make it. So all the other stuff I get is um, keep money.
Oh man. So you're in the black from here. It's all profits from here on.
That's right. Well, I'm really proud of you. How does that feel? Very good.
I'm excited. Have you learned anything about your products based on what's selling? Have you learned what's a winner? Well, as we know bracelets are definitely a winner and then scrunchies too because yeah, lots of people are getting the scrunchies as well. Yep.
Excellent. Well, congratulations on that. We'll check back in with you later.
Okay, thank you. Good job. Thank you.
Okay, Joy, we're at the end of your booth. We just tore down. There's a lot going on.
There's a fountain behind us. There's a DJ playing some kind of jazzy Latin fusion over there. Tell me how did it go today? It went really great.
And how do you feel about yourself? Um, really good. I made um, like, over like a hundred dollars, like two hundred something. Well, I'm pretty sure.
I want you to know that your mother and I have decided we're going to pay your entry fee. So you get to keep that money too. Thank you, daddy.
Thank you. Does it feel like your weeks and weeks of sewing and crafting paid off? Yes, it does and it feels very good. And now everything you got left over is just profit.
So, you could sell that wherever and it's just profit, isn't that good? Yeah. Yes, very. And sister, what do you think of what happened here today? Awesome.
Were you proud of Sissy? Yes. And was it fun to like work with her as a family? Yeah. Team Manuel.
Great job, darling. Thank you. So there it is.
What do you think? I think the next step for you is is going to be to approach her with the funding deal where you offer to take 30% of the business in exchange for, you know, a series, a series A round. Yes. See if we can really get this thing growing.
Yes. Well, her next to her move immediately was, well, I have to open a netsy shop. So she now has the Etsy shop going and who knows where that will lead.
As some people might know, I have relatives, I have a niece who has created an empire out of selling soap. And it's started in much the same way, very, very home grown. I don't know that my daughter will be selling bracelets when she's 40.
But hey, it's great experience. That was my, that was my bottom line was what a great, fun, safe, good experience for her and taking a little financial risk and getting a payoff for it. So that was, that was, I don't know, dad corner for the day.
Thank you for indulging that. I hope it inspired you now then. Let's talk about what we're here for today, Stephen.
We, I came for the cookies, but I don't see any cookies anywhere. Oh, I got your cookies. Okay.
Ready. Okay. You've got, you've got idea cookies for me.
You got brain cookies. I got 401k cookies. Oh man, the tastiest kind there is.
Yep, they have some IRA chips in them. That's just, you might have to edit that out. I don't even know if I can stand by the pun.
So the last few weeks, we've been talking about what to do with your employer sponsored plans. 401ks, 403b's, 401a's, all sorts of things. But we talked about, kind of what are they, what are they, how do they work? And then last week, we gave you four rules.
And just to quickly, quickly recap those rule number one was always get the match. So if your employer matches funds, make sure you contribute to get that number two is pay attention to the fees. We talked about how to do that.
Number three was pick a reasonable asset allocation. And that article, if you are wondering is still up at Abrahams wallet.com should be one of the first two articles when you go to the site. And you can learn what we mean by asset allocation.
You can even learn what the heck are the assets I'm allocating between? What are my choices? So I'd encourage you to check that out. Maybe we'll podcast that someday. And number four was coordinate with your other investments.
So a lot of times, all of your money won't be in your 401k. You'll have some 401k and some other accounts and how do you make them all work together? So that was what we reviewed. And I said, there's going to be one more step here, which is one that a lot of people, this is the first time after they go through their HR onboarding.
The first time they really think about their 401k again is when it's time to change jobs. So what do I do with all this money, whether it's a lot or a little, but I do with this thing that I've been saving in. And now I'm leaving the company that was sponsoring this plan for me.
Have you ever been in that situation? It's funny that you would ask because yes, Mark, I have been in a situation where one leaves one's job and then one has to make a decision. Do I leave the 401k as it is? Or do I get my hands into it like a delicious dough? And do I start working it and making something more wonderful out of it? Yes, I've been in that situation, yay, barely this year. And I'm noticing that my microphone sound has changed.
So I'm just acknowledging that if other people can hear that as well. Yeah, it sounds the same to me, but I'm also listening to you through the Zoom. Okay.
Yeah, that's right. So I would say that my goal today is just to give you a basic rundown of your options when you have a workplace retirement plan and you're changing jobs or even maybe some of you are retiring. Oh, we have some retiring age listeners these days.
That's exciting. Very thankful that somebody would listen to us talk. Listen, I will interject here.
Gray beards always welcome. There is a flashing light in front of my life that says gray beards welcome. I like hanging around older people.
I want them speaking up. I was in a board meeting today when one of my gray beard buddies, Larry, was popping off and opining. And then at some point he mysteriously and ridiculously said, Hey, if you ever want me to shut up, just tell me to which I said, Larry, the whole reason you're in my life is to speak up.
So say everything that you think we are very pro gray beard. We want older folks around. And we think we think we can we have some help to offer.
You certainly have some expertise. I have some expertise. But man, they have wisdom and expertise that we love.
And whoever walks with the wise grows wise. So if you're 23 listening to this, I have a little word of advice to you. Go collect gray beards in your life.
Get them around you. Get them around you and walk with the wise and grow wise. Okay, sorry.
No, I just have to interject that because I don't think people understand that. All they want, they want to be around the hot skinny gene. Whoever's got the influencer, a lot of followers on Insta.
I understand the allure of that. That's not how you grow into maturity and wisdom. Yeah, there's a guy I follow on Twitter who's kind of his thing is helping men dress well.
And he did a he did a post today. He did a post today on the embarrassment. And I think he used the word shame of men who don't dress their age either young men who dress like old men or old men who dress in the skinny jeans and the hipster boots.
So it was actually kind of awesome. But that's what that made me think of. So collect gray beards, avoid the ones that are dressing like 22 year olds.
Yes. Awesome. Okay, so what are your options when you're switching jobs and you have, let's just say you have a 401k.
If you have a 403b or one of those other accounts I mentioned, it's the same general. Same rules. You have four options.
And Steven, you can go ahead and tell me which one you think's the right one to do after I say this. Okay, I like this game. It keeps you engaged.
There's a prize in the end. Yeah, you can roll the assets into an individual retirement account. So you can take the assets out of the plan and without any penalties or fees, you can move them into an individual retirement account.
Door number two, you can just leave it there. So you go to a new company, even if you start a new 401k plan at the new company, you just leave the money at the old plan. I'm going to put an asterisk by that because there are plans that actually will kick you out if you don't work for the company anymore.
But a lot of them will let you leave it in place. So that's an option. Number three, you can roll the assets into a new 401k plan.
So if you're just switching from a company that you've been at to a new company and the new company has a 401k, usually the new 401k is happy to have your money and charge you fees on it. So they'll say, go ahead and roll those assets into our 401k. And then all your money will be in one place at the new companies 401k.
And option number four is you can just say, I would like all that money right now in cash. Okay. So can we eliminate any options? Okay, yeah, let's so let's review.
You can leave it Pat where it is. You could roll it sideways into your new companies 401k. You could roll it into an IRA or you could get it out in cash.
So yeah, those are options. Okay, so I would like to, I'll take the last question first, Alex, and I would like to say, we don't pull the cash lever and get a dump truck worth of cash out of the end of it. That's the worst thing that you could do.
That's right. Because if you are under 59 and a half, you're going to get a penalty of 10% of whatever the value is. So just a penalty, it goes to the government.
And you're going to get taxed on all that money as if it was income to you. So we don't want that. Don't do that.
That's the worst option. Now we're left with three options. And do you think there's a right answer between these three? I mean, I'm interested to hear what you're going to say.
I would say that two of these options leave me cold, which is leaving it to stand pat or putting it in another 401k program. That's a shoulder shrug for me. I'm the most interested in moving it into the IRA.
Okay. So the answer is all three of those options are the right answer in certain situations. And I'm just going to try to explain to you what the considerations are that would tell you which of those three options are.
Okay. If all three of them are the right answer, then by having chosen one of those three, I could say I got the right answer. Yes.
And you actually, because you got the right answer, are this weeks featured answer winner? Thank you so much. I knew there was a reason that I came today. Oh, this feels good.
Do you have any social justice messages you'd like to share or you know what? I want to dedicate this win to all of the ducks that died during the Exxon Valdez spill 30 years ago or whenever that was. I because nobody remembers them. No, but I'm holding a torch out for those petroleum stained ducks.
And I I'll never forget their pain. So this award, I want everyone who didn't win this award to feel guilty about what happened with the Exxon Valdez. Thank you.
Yeah. There were there were ducks and there were lunes that were oils. Lunes.
Okay. That's what a lune sounds like. Okay.
So let's talk through some of the considerations that would help you figure figure this out. You know, in terms of rolling it into an IRA, an IRA is an individual retirement account. It has a lot of the same rules as a 401k.
You also can't touch that money until you are 59 and a half without paying a penalty. And once you turn 72, just like a 401k, we talked about this in episode one of our little 401k series, the government's going to start saying you have to take money out now because they want taxes on that money and they're going to charge you income tax. So, you know, we talked about Roth versus traditional.
If you have a Roth 401k, you will have to roll the Roth part of it into a Roth IRA. And that will be tax-free forever. If you have a traditional 401k, which is still more common for most people, then you'd just roll it into a traditional IRA.
Why would you do that? Well, an IRA, you can invest in just about anything. There was this great story. I don't know if I mentioned it in a previous episode, but famous venture capitalist Peter Thiel, he had built up a Roth IRA, meaning it's never going to be taxed again with $5 billion in it, which is pretty crazy because you can only put $6,000 a year into one of those suckers.
But that's just a fun little factoid. Do you know how he did it? Nope. He used his Roth IRA to buy extremely cheap shares and companies that he was considering investing in.
That would have been my only guess. He would have had to keep the money in the funds and in the program, in the IRA program, and inside the program, he would have had to make incredibly volatile, cookie, shrewd investments that went wild. Yeah, so he knew they were going to go wild because he knew he was investing in them, but he was able to carve off a certain type of share and use his IRA to buy them for nothing and then have them be worth hundreds of millions of dollars.
So if you have access to that type of option, we recommend it because it's great to build up $5 billion of tax-free money. Yeah, that is one of our strong recommendations that if you can build up $5 billion, you should do it. Even if you have to pay taxes on it, it's usually still a good choice.
That's right. That's right. So the benefit though of an IRA, I tell that story because you can invest in a whole bunch of different things.
Just about everything out there in the stock and bond world is investable for you versus in a 401k, there's a very set group of things that you're allowed to invest in. So a lot of times that is the number one impetus for people to go from 401k to IRA is you can now invest in whatever the heck you want. There's not just 10 fund choices for you.
Depending on the 401k and the IRA, you might pay substantially less fees in an IRA, but not always. So that one, you have to kind of go back to episode two where we talk about fees. It's important to know what the fees are.
I would say this is the most popular choice to roll into an IRA. Now, why would you not want to roll it into an IRA? There's a few things you might want to consider. 401k plans have slightly higher shields around them from bankruptcy and creditors.
So if you are facing impending bankruptcy or you have got some bad gambling debts or something, then you might want to leave your money in the 401k. It does not have higher shields around it for things like liability suits. This is specifically if you were going to file bankruptcy.
Then 401ks are a little bit more protected than IRAs. I hope that if you're in that situation, you are frying bigger fish than worrying about where to roll over your retirement account. But it's worth noting.
One of the big ones, we've talked about doing Roth contributions. Well, if you're doing that $6,000 a year into a Roth IRA and you're just starting to build up a pile of tax-free money for the long run, you can only do that if you make $208,000 a year or less if you're married. So if you make more than that, you can't contribute directly to a Roth IRA.
And this is a crazy rule. I think we've probably talked about it before. What you can do is contribute that same amount to a traditional IRA, which is not going to give you any tax break, an after-tax contribution, and then 10 seconds later, you can turn it into a Roth IRA contribution.
So does it make sense? Thank you to our genius political regulators. But that's the rule. Now, if you have other IRAs outstanding, it screws that up.
So if you're making more than $208,000 and you want to keep doing these back, they call them backdoor Roth contributions, you are going to have issues. So again, sometimes that means don't do it. If you're trying to get around that, then you could either leave the money in place.
And that would be one circumstance where somebody, Stephen, might want to leave it in an old plan. Let's say you're going to a new employer that has a cruddy plan. So you don't want to roll it into the new plan, but you really want to make these backdoor Roth IRA contributions, then you might leave it in place so that you have no other IRAs that will mess up your backdoor contribution.
It is worth noting that if you, this is for each spouse, so I had an old 401k that had grown pretty big. And when I left a company, I decided to roll that into an IRA where I could invest in whatever I wanted. And so now I don't do backdoor Roths.
However, my wife is still able to do them because she doesn't have an IRA in her name that messes it up. So we still can do half of the amount in Roth contributions each year. So the last reason you might want to do to not do an IRA contribution that I've run into is with a 401k plan, if you separate from service from a company, so you're no longer working there, you're allowed to take penalty-free distributions starting not at age 59 and a half, but at age 55.
So if somebody is doing an early retirement, but they're going to need the 401k money that they've saved up, then sometimes we'll say, hey, you're 55. If you take this money and roll it into an IRA, then you're not going to be able to touch it for four and a half more years. But if you leave it in the 401k, you will be able to get to it with no penalties right now.
So we might leave it in the 401k plan for four and a half years until they turn 59 and a half. And then we're indifferent and we roll it out into an IRA and invest it however they want at that time. Or buy a mountain vacation home.
Yeah, if it's big enough, then they could consider that. But let's cover the primary basis first. Yeah, okay, okay.
So that's an IRA. Now, with when you're looking at a 401k plan, I think a lot of plans, we talked a lot about fees and I kind of harped about that a couple episodes ago. A lot of plans have very low fees while you're working for the plan sponsor.
That's the company that you work for that set up the plan for you. And a lot of times the company you work for will cover those fees if there are higher fees while you're working there. But once you leave, they say you can leave your money in the old plan, but we're not covering your fees anymore because you don't work for us.
Gotcha. And so it's really important to make sure it's very common for me as a financial planner that I will run into people who have just left money in an old plan. Yes.
And they didn't realize that, wow, when I left, they're now draining. They're now draining. Jacked through the roof.
Yeah. So the way to figure out if that's you is to go back to that document we talked about the plan document, which you can request from the HR people at your old company. And it will tell you all the rules of if you leave and how the fees work within service and out of service.
So check on that if you're even considering leaving it in place. If you have to pay one and a half percent, two percent fees on money, and you're only doing that. So you can stick six grand a year into a Roth IRA.
Yeah, that might be not worth it. So something to consider. Okay.
Now, okay, are you going to tell us how this quote rolling process actually works? That's what we're going to cover. And then we're going to bring this one home. And then we're going to roll.
We're going to talk about rolling over. And then we're going to roll out. Okay.
I talked about if you roll, if you roll these over into an IRA, you can't touch it until you turn 59 and a half. You must start taking it out. By the time you turn 72, that's when these required distributions start.
The same is true of a 401k, although if you're still working at 72 and you don't own any of the company, then you don't necessarily have to take the same distributions. But this is nerdy details stuff that if you're really dealing with still working at 72 and trying to minimize your distributions, then you should just call us because you're dealing with some more complex stuff than we're covering here. Yes.
But we talked about kind of the idea of leaving it in place if you're hard to get a job at age 72. For whatever reason, life circumstances that happened. And you have to get a job.
Maybe it's just a part time job 15 hours a week. You're 72 years old. Where do you want to work? I have to work for someone else at a company.
No, I'm going to say you have to work hour. You have to get an hourly wage somewhere. Man, I think it might my hobbies and stuff change so frequently it would be whatever I was into at the moment.
But right now, I think I wouldn't mind being that guy at the NBA game, like the jazz game, checks your ticket and stands there and watches the whole game every night. Oh, because that guy is always, he's always like in his 70s. That's true.
That's true. And that's just a free season ticket and you're going to pay me to. That's a win.
You're right. And it's like two, it's like two nights a week, right? Yeah, that's a great one. I was going to say work at the pro shop or the local country club golf course.
But but yours is even better. Because I feel I feel like I'm part of the action when I'm at those NBA games. I feel like I know what's happening in the world.
I feel sorry, sir, stand there. You cannot come up the aisle until they are done shooting free throws. That's exactly right.
Even though everyone in the arena is waving the noodles and screaming right behind the backboard, you walking up the stairs, it's going to bother. That's going to be distracting. I would I would want to be the guy right down on the floor that's keeping the riffraff off of the floor seats.
And they usually wearing a vest of some kind or like to be there. Yeah, I think you might need to have a little bit more muscle mass for that job by the time you turn 70. Okay, I don't know.
Those guys, they have to be able to catch the occasional streaker or something. Okay, all right, back to your 72 year old. Okay, so we've kind of covered the rules.
But if you say, I know that I'm ready to do a rollover. So I'm going to move money from my old 401k into an IRA or into a new company's plan. There are two types of rollovers.
And this is important. Okay, one is called a direct rollover. And the other is called an indirect rollover.
Oh, perfect name. Yes. Now, with a direct rollover, you provide instructions to the old plan.
So let's say you worked at Procter & Gamble. And now you're going to go work at Gillette over in France. That is a that is a Procter & Gamble company.
Sorry. Oh, that example. What's the second biggest company in Cincinnati? Kroger.
Let's say you worked at Procter & Gamble. And now you're going to go work at Kroger. So you will tell the 401k custodian.
That's the company that actually holds your funds. I want you to send my money to the new plan. And what they will do is either create a wire transfer or send an actual paper check.
But it will not be made to Stephen manual. Good. It will be made to new companies custodian.
Let's say the old fund is the old 401ks at Fidelity, the new 401ks at TD Ameritrade. Fidelity will send TD Ameritrade a check that says it's made out to TD Ameritrade FBO for the benefit of our Abraham and Comey who's making the transfer here. Yeah, yeah.
That's very important that it's for your benefit, but not written out to you. Yeah, occasionally you will have a lazy provider. This is true.
Any time you're moving money from one tax advantage account to another, you could be switching financial advisors and you're moving money from an IRA to a new IRA. You occasionally will find somebody who says, I'm just going to have them send you a check. Now, you don't want that because that is called an indirect rollover.
That's where they send you a check and you must deposit that check within 60 days. Otherwise, the IRS goes, oh, that was just a distribution. And now we're going to hit them with the 10% penalty and tax the whole thing.
Terrible. We don't want that. You're also only allowed one indirect rollover per year.
So if you were to try to do it twice, it would cause problems. And lastly, with indirect rollovers, this is the, you could deal with the other stuff. You could deposit it within 60 days and to a new account.
You'd probably be fine. The real negative is, they are required to withhold 20% for taxes when you do an indirect rollover. But you, let's say that you had $100,000 in a 401k and you did one of these, they send you a check for $80,000 because they have withheld 20.
In order to not get penalized, you have to put $100,000 into the new account, but you don't get the 20 back until you go and file taxes. So very important that you don't get this wrong unless you're just sitting on cash and you can wave your hand until some accountant do this for me. I don't care about the consequences.
So we want to do direct rollovers whenever possible. And if you're going to do an indirect rollover, just be super aware, you can't just take the check they sent you and stick it in the new account. You got to figure out what they withheld for taxes and also put that in the new account.
Or you get pinged for all the penalties we discussed. What did we miss out here? I feel like this was a pretty straightforward what to do. Yes, I think it's been fairly thorough.
Now, did you tell us what to do? I feel that we know where to go when we're doing new companies. But did you tell us what to do if we want that in an IRA that we can manage ourselves? Yeah, so if you want to put this in an IRA either that you're managing yourself or you're going to work with an advisor, then it's the same process. That indirect or direct rollover can work for an IRA or a new 401(k).
We did not talk about how to invest that. Although if you really wanted some starter details on that, I think you could go check out our asset allocation article. It would apply also to IRAs.
I don't think there's a whole lot of difference between an IRA and a 401(k) in terms of moving from point A to point B. But I'm just imagining somebody who they were at a job for five years. They had a 401(k) that was being developed.
They don't have a personal investment account somewhere. But now they've got 401(k) money and they want to do what you're describing about putting it into an IRA. Here's where I will try to be very impartial and also probably sound like I'm making a pitch for what I do.
Speak freely Mark. Don't worry about the haters. You just say what you think is best for people.
The haters. Okay. I think that if you're the type of person that is just a gunner on I love to do personal finance, I want to run my own investments no matter what, then you turn to this podcast off probably at episode one because you already knew all this stuff.
But if you're thinking I don't even know where a person sets an IRA up. There's a couple of things I would say. One is that this is usually one of the transitions in life where people at least reach out to a financial planner to say, "Now if I wanted to work with you, tell me what it would do for me." And I get a lot of those calls people saying, "I'm changing jobs, I've got a hundred thousand dollars or half a million dollars or sometimes three million dollars in an old retirement account.
Just depending if we're talking about somebody who's worked their whole life or somebody who's worked for five years." And my advice for let's just focus on somebody who's been in the workforce for five years and they have a modest size 401(k). My advice is I think it's a great time to do some in-depth planning where we go in to end and figure out what are the details of your financial life. Are you on track? Are you ahead of the game? Or a lot of times, I don't mean to scare our listeners.
But people think, "Well I've been saving, I got the full match like these Abraham Wallet guys said and I've been saving 5% of my income the whole time." Most people don't realize most of us are going to need to save like 15 to 25% of our income. If all we're doing is traditional stocks and bonds types investing. So I think it's a really good time to just reach out and say, "Wher...
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