In the article, “A 401(k) Rollover Checklist,” Morningstar’s Christine Benz presents seven steps to help you decide what to do with that dusty 401(k).  We’ll recap them briefly here.

Step 1: Check the value of your account.

The amount in your 401(k) determines the breadth of options open to you.  If the balance is greater than $5,000, then you can either leave the money where it is in the plan or you can roll it over into an IRA or your new 401(k), given the plan allows those choices.  On the other hand, if the balance is less than $5,000, you might not have much say in what happens, though you should avoid pulling the money out, as it will be slapped with a penalty if you’re younger than 55.

Step 2: To keep the money in the 401(k) or not?

In the article, Benz notes that she often recommends moving assets from a 401(k) into a no-fee IRA, rather than keep it in a retirement plan that is sometimes saddled with high costs and fees, saying that “You can put almost anything you like within an IRA, and you’ll usually be able to avoid any administrative fees if you shop around” (Benz, 2014).  However, some people prefer staying within the boundaries of the 401(k), and the options available there, and the decision comes down to personal preference and needs.

Step 3: Examine the quality of your 401(k) options.

If this is you, and you want to keep the money in the 401(k), make sure it is the best possible plan for your balance to be.  Do some research into the quality of the plan, and determine whether or not to stick with the old employer’s option, or that of your new employer.

Step 4: Find the right IRA provider.

If you decided to ditch the old 401(k) and instead roll your balance to an IRA and not your new employer’s 401(k), you need to determine the best company or firm to move your account to.  While there are resources that exist if you want to do your own research, this is a decision that your financial advisor could walk through with you.

Step 5: Choose whether to convert your Traditional 401(k) assets to Roth.

If you have Traditional 401(k) assets, and you roll that over either to an IRA or to your new employer’s 401(k), this is a good time to think about whether to move those to a Roth account as you do the rollover.  If you made Roth 401(k) contributions, however, and you roll that money over to either an IRA or your new 401(k), that new account will also be Roth.  Again, Roth means that you will not owe taxes when you go to make qualified withdrawals.

Step 6: Do it.

Once you’ve done the hard work of making all the decisions and determining where your old 401(k) will go, start the process of actually getting it done.  Rollover paperwork varies based on where the money is going; it may be more complicated if rolling over to your new employer’s 401(k), for example, and you may have to wait longer or do more leg work.  The important thing in any case is to make sure that the provider of your 401(k) makes the check payable to the IRA or new 401(k) provider and send it to them directly, instead of you.  Otherwise, a percentage of the balance will be withheld for income tax, there will be a deadline to deposit that money, and failure to meet the deadline will end in a penalty for early withdrawal.

Step 7: Choose what to invest in.

Now that all the logistical steps are behind you, you need to determine where your assets will be invested.  If you chose to rollover into a new 401(k), a solid target-date fund is the stress-free, no-sweat option.  You can also take the opportunity to reassess the various pieces of your financial plan and evaluate your outlook for retirement.  Either way, congratulations on finally doing something with that old 401(k).  Call it spring cleaning and give yourself a pat on the back for marking something off your financial to-do list.

Benz, C. (2014, August 24). A 401(k) rollover checklist. Morningstar, Inc. Retrieved March 10, 2023, from https://www.morningstar.com/articles/662592/a-401k-rollover-checklist

A plan participant leaving an employer typically has four options (and may engage in a combination of these options), each choice offering advantages and disadvantages. For balance, please update your material to include each option below:

• Leave the money in his/her former employer’s plan, if permitted;
• Roll over the assets to his/her new employer’s plan, if one is available and rollovers are permitted;
• Roll over to an IRA; or
• Cash out the account value.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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Here are some bullet points for your consideration:

• Your IRA and company-sponsored retirement plan’s beneficiary designations trump your will. If your will says your assets are to be divided among your children, and the beneficiary designation on your 401(k) says that a charity is the primary beneficiary, then the 401(k) will go to the charity; not your children.
• Your spouse is intended to be the primary beneficiary of your employer’s retirement plan if it is governed by ERISA. A change away from this will require your spouse’s authorization and a likely notarization.
  • If you do not specify a beneficiary(ies), your spouse will be your beneficiary.
  • Some retirement plans are not governed by ERISA and thus this may not apply.
• If you list your spouse as your primary beneficiary and later become divorced, you must update your beneficiary designation. It doesn’t matter if that beneficiary is now an ex-spouse; he or she is still a beneficiary.
• Consider reviewing your beneficiaries annually. In addition, consider your beneficiaries in the case of family births, deaths, marriages, and divorces.
• Consider naming contingent, or secondary, beneficiaries, especially if you’re married, since the chances of something happening to and your spouse, together, are higher than, say, a friend who is named as a primary beneficiary.
• Some beneficiary designation forms are interpreted as pro rata, which means the assets are divided among the remaining listed beneficiaries. In some beneficiary designations a per stirpes designation is possible. In those cases, assets pass on to descendants of heirs.
• Naming beneficiaries can avoid probate for the assets. Probate can add additional time and cost to the process of distributing your assets.
• You can name a trust as a beneficiary, but you’ll definitely want to work with legal counsel on this to make sure the trust has the correct language to give your heirs—and possibly their guardians– appropriate flexibility.

This information is not intended to be a substitute for individualized legal advice. LPL Financial does not provide legal advice.

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We suggest a total contribution of 15%, which includes your employer’s match. This comes from research done by Fidelity.

They found that folks will need to spend between 55-80% of their preretirement income to keep the same lifestyle in retirement. So, someone earning $100,000 before retirement would need to spend between $55,000 – 80,000 in retirement to have the same lifestyle

However, when Fidelity looked at Social Security estimates it found that for most people, generating 45% of preretirement income ($45,000) ought to be a good target. Furthermore, if you start saving at age 25, saving 15% ought to be able to get you there.

Here is a link to a piece that Fidelity published on the subject: https://www.fidelity.com/viewpoints/retirement/how-much-money-should-I-save?

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• Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of benefits to them;
• Carrying out their duties prudently;
• Following the plan documents (unless inconsistent with ERISA);
• Diversifying plan investments; and
• Paying only reasonable plan expenses

(Source: Department of Labor publications “Meeting Your Fiduciary Responsibilities”)

You will be solely responsible for these aspects unless you choose to share or shift that liability. We can help with that.

• As a 3(21) Investment Co-fiduciary, we will share this liability with you.
• As a 3(38) Investment Fiduciary, you entirely shift this liability to us.

3(21) Investment Co-fiduciary

In this capacity we recommend and monitor your investment lineup, on an ongoing basis, helping you ensure it adheres to certain criteria established by you. If we determine that an investment should be replaced, we make that recommendation to you, and it’s up to you whether to implement the change(s). It’s because you have the final say that we only share liability with you.

3(38) Investment Fiduciary

In this capacity, we select and monitor your investment lineup. If we determine that an investment should be replaced, we replace it. That is, we don’t make a recommendation, we just do it. Because you are not approving recommendations, you entirely shift the investment selection responsibility to us, although you have a fiduciary responsibility to prudently select and monitor us, the investment fiduciary. We think that as a client of ours, there are certain things you should expect from us. You can see our Client Bill of Rights by clicking here.

Setting Up Retirement Plan

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• How much can you afford to contribute to the plan?
• Which should you contribute to, the Traditional or the Roth plan?
• How should it be invested?
• Are your beneficiaries correct?

Most participants can figure out number one by themselves, and we address number two in this blog post. Number three can be a tricky one, though, so I will address it here.

The investment choices in your retirement plan will likely fall into one of three investment product categories:

1. Age-based investment products – these are investment products intended to follow one’s career all the way to—and sometimes beyond—retirement. They employ what is called a glide path, which is a systematic way to shift the mix of investments from risky to safer as one gets older. In short, a 60-year old should not have the same mix of assets as a 20-year old, all else equal. These were designed to be all-in-one funds, to represent 100% of one’s account/plan, but don’t have to be. Additions of other investments, however, will dampen the systematic shifting described above.
2. Allocation or other all-in-one investment products – these are similar to the age-based products, in that they can be complete investment choices if they are properly diversified. Typically, these include within them a mix of stock and bond investments. They differ from the age-based products in that they do not factor in one’s age. Often there’s a connotation of risk; words like “aggressive” or “moderate” may be included in the names.
3. Everything else. Your retirement plan includes a menu of fund choices that likely includes one and/or two above, but it probably also includes other funds, such a foreign stock fund, a small-company U.S. stock fund, bond funds, etc.

From here, we have a choose-your-own-adventure way of considering these options. You can choose the restaurant metaphor or the plant metaphor.

The Restaurant Metaphor

I deliberately included the word “menu” in #3, above to transition into this metaphor—and it’s a bit of a stretch. Option #3 is like ordering off the restaurant menu, ala carte. You choose the entree, your sides, and maybe a dessert—or you can choose two desserts; it’s up to you. Option #2 is like ordering a combo meal, where everything is chosen for you. You get the burger, fries, and a drink. Option #3 requires a little imagining, but it’s like ordering a combo meal tailored to your BMI (Body Mass Index). Maybe your BMI is a little too high, so you might get the grilled chicken with lettuce, tomato, and no sauce instead of the burger. I’m not aware of this option at any restaurant, and that’s fine with me…I can make my own choices, just like in a retirement plan, but if you want some help, options 1 and 2 are available.

The Plant Metaphor

Imagine three plants you can choose from, an orchid, a succulent (e.g. a cactus), or a silk plant. Orchids are notoriously difficult to grow—one has to know how to care for an orchid; neglect it, and it dies. This is like investment choice #3, above; you really need to know what you’re doing. Invest too much in the wrong fund, and you could be in for a wild ride or you may come up short of your retirement goals. What’s more, you’re going to need to check in on your investments to make sure they haven’t gotten out of alignment. Option #2 is more like owning a succulent. The snake plant in my office thrives on a monthly watering. Otherwise, I can just enjoy it. It needs a little care, but nothing like an orchid. Option #1 is like buying a silk flower arrangement. It won’t ever need watered, and it will still look nice. You can’t totally neglect it though; it’ll need a periodic dusting off so that it looks nice.

For me, it’s the age-based option because even though my entire career has been in investments, I don’t want to have to check on my 401(k). I have more important things to do like raising a family and going fishing. Maybe for you, though, there’s a thrill in allocating portions of your retirement plan to different investment types. Just keep in mind that you will need to be a bit more involved with your retirement plan.

To be clear, your retirement plan’s investments should never be neglected, but some need more/frequent attention than others. We are happy to help you understand your plan’s investment options, and you can reach us by clicking on the Contact Us button on the upper right-hand corner of every page on our website.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult with an investment professional prior to investing.

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Let’s review the difference between the two options. The Traditional option has been around as long as 401(k)s. With it, you contribute before taxes are taken out; it’s a pre-tax contribution. The funds grow tax free. In the future, when the funds are withdrawn, they’re taxed at the then-prevailing tax rate.

In contrast, a Roth contribution is an after-tax contribution. With this option, the contribution is made after all taxes have been paid. Then, in the future, when funds are withdrawn, there’s no tax to be paid for qualified withdrawals.

A pre-tax contribution is essentially a bet that taxes in the withdrawal phase will be lower, while a post-tax contribution is a bet that taxes will be higher. As to which one you should consider, just figure out when your tax rate will be lower—now or in the future—and make the corresponding type of contribution—which is a lot easier said than done.

One rule of thumb is that the younger you are, the more a Roth contribution makes sense. Salary and compensation usually increase over the course of one’s career, putting one into higher tax rates because of our marginal income tax system, which taxes higher income at higher rates. So, if you expect to have a long career ahead of you, consider making a Roth contribution.

In contrast, the older you are, the easier it is to estimate your income in retirement and, in turn, income tax rates. Someone contributing to a qualified retirement plan at age 63 should have a better estimate of their income at age 66 than someone who is 33. You might think of this as a tipping point, that age when your income in retirement will be lower than it is now. That may be the time to switch to a pre-tax contribution.

One can also consider current income tax rates and where they are in relation to past income tax rates to give one an idea of what tax rates could be. Right now, in 2021, income tax rates are about the lowest they’ve been since the end of World War II. On top of that, our national debt continues to grow, which suggests that tax rates will have to go up to service that debt in the future, although there is no guarantee that will be through the income tax system.

If you don’t know what your income tax rate will be in the future—I sure don’t, why not consider making both types of contributions? Call this the-future’s-uncertain strategy. With this strategy, one aims to have both pre-tax and after-tax (Roth) funds in retirement. That way, regardless of what tax rate you face in retirement, you have options. Tax rates higher than you expected, you have the after-tax funds to draw from; tax rates lower? one has the pre-tax funds to draw from.

Furthermore, if your employer offers a match, as of 2021 that match is a pre-tax contribution. So, if your employer matches 80% of your contribution up to 5%, you’re part way to my proposed strategy above. In this example, a 5% after-tax, or Roth, contribution is matched with a 4% pre-tax contribution and—voila—you’ve got the-future-is-uncertain strategy; money ends up in both categories. Then, as you progress in your career, you can consider increasing the pre-tax contribution.

Roth Contributions also mean you are saving more for retirement because the $100,000 in Roth funds is all your money, whereas the IRS will get a portion of the $100,000 pre-tax contribution.

There are also no Required Minimum Distributions for Roth IRAs. With a traditional IRA, you may be forced to take more money out of your accounts than you want to.

Finally, your heirs will inherit Roth accounts tax free. If they’re in a higher tax bracket, it’s a good way to pass along generational wealth.

I hope that’s helpful. If you have more questions, call us or shoot us an email.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

There can be no guarantee that strategies promoted will be successful and no guarantee of positive results.

The investment strategies mentioned here may not be suitable for everyone.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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