What Those Letters & Numbers Mean For Your Retirement (S2EP4)

Tuesday, February 14th

00:27:14

If your job offers you 401K matching TAKE IT!  On this episode we answer a question from a listener who is dealing with several 401Ks. On your journey to retirement, Sheri and Kris have the tips for beginners and experts. 

Transcription

Hey if you're job offer you free money why wouldn't he take it. Free money might be the very thing you're missing out on on this episode of her money we're talking 401K. Her money is sponsored by Carol financial hi this is thinly nestled financial advisor with Carol financial. They may not to retirement can be curvy confusing and public detours and stops with your simply getting started approaching retirement for far somewhere in the metal joining us very new series of workshops this break. We college retirement. Simple for more information visit our website it's Carol financial dot com. Part of becoming a growing often is the phrase 401K. You cheer all the time Max out your 401K definitely one of 401K. Don't forget that your 401K is going to be your retirement nest egg. But how this for a long can work like this for a one cake how do you use a want and how do you maximize one's got to this episode of her money was. We Sherry lynch and Chris Carroll and Chris. We have an email from one of our Hermione listener score Jim writes. A fast approaching that magical age of seventy and a half I have a 401K that have held since the ninety's which is dumb very well. And irregular IRA which I created from three smaller for a one case. This is like a word problem Monday S eighteen some nine Q my question is should I rolled up for a one into the IRA and take payment from the air security payments from both. Thank you let's start with talking about the difference between a 401K. And an IRA and what I love about Sims questions. People are so career mobile I'll now the idea that you might have the same job and the same for a one K forever is kind of a thing of the past yeah so you might have multiple for a one case. Yeah I mean even in some cases you'll find people have three or four forewarned case because they're golf around right so. Sue for a ruling came whenever you hear these sort of letter number combinations. All it's referring to use the section of the IRS tax code okay so what's magical about forewarned Kaye is it's a tax advantage okay. The tax a villages that you don't pay taxes as a gross. So you can make money without being taxed on those earnings. Now. The other side of it is when you take the money out it's going to be tax because that money was never taxed before. So none of the money was ever taxed before or just think he what are you Texan and the whole pile here. It grows so sue. It's it depends hurt and it removes these it depends answers some people might have what's called a raw forward and care option from Ross. Whether it's an IRA or forward came means that its after tax money goes sentence of the money's been taxed. But if it's a regular 41 K or ring your higher rate than the money was never talks are okay sir. You put in money that was not taxed big group it wasn't tax as a group in the new take it out and it's taxed and then a case soup that that. Email refers to this magic seven the and a half. What did you what is that is check yours you're the magically just. Only one or something went dead sending him because it's a semi and a half is magical because that's when the government says hey you never pay tax on the money. Now you're gonna have to start paying some taxes even if you're not retired the you hold on there's a little special case there are you making it harder but that's okay. If you're just what I do if your over seventy and still working. You might not have to take distribution jetBlue wind you're not working anymore and you turned seven in a half you have to start taking were called required minimum distributions every year. And it happens the year you term of seventy perhaps of the calendar year so my birthday is an October. Somewhere and I eventually turn seven the I won't turn seventy and I have told the year after. OK so it'll be the year after that calendar year I'm gonna have to start taking money out of the tire. When you take it out it gets taxed and all think it's tax your question before so then you're getting taxed on the amount you take out if you take out 101000 dollars. You're tax from 101000 dollars okay because none of the money was ever chat. And the theory is it is it Chris that except Indiana half. You would be any different tax bracket and we will earning like a boss and oh and yes so that's the hope right the hope is that. Yeah you're in the lower tax bracket then when you're taking money out. Obviously that structure for everybody right most people are in lower tax brackets when they're retired. So year. You're putting money in and that's not tax when your higher tax bracket and then taking money out later in life. And it's being taxed then at hopefully a lower tax asset. Okay that part of the magic of the Roth tomorrow your YUPU here's the Ross's. Some people might actually not be in a very different tax bracket in retirement than they are when they're working so those are the people that wanna use a Roth option where they put after tax money in and then they're only taxed on however much it groups they're not at all and I'll shut the door yes so there. It'll be it is and if you're very young at the Roth is what you should be doing and here's here's didn't tell the numbers were OK if you're more than fifteen years from retirement. Do the Ross. No one ever lake cook announced this. Because you hear all the time for a long Kaye forum K Max it out to worsen news that hey Steve should really do a loss well and a lot of it okay so it's not that well you. Kept secret okay like a lot of people know this it's just one of those things where. Really complex things. Are hard to you know how do you get the message out. He this is a complex issue but if you're more than fifteen years from retirement you really ought to be doing Ross forewarned K if you can't oh and by the way not all companies offer Ross forward Kayla I remember there's room for you lifted he has so. You just need to ask and you need to look I think it's more more common I would tell you that five or six years ago nobody had one. Now a lot of companies have a Roth forward K option and it's it's literally a box she checked now. That means you're gonna pay taxes on the money that goes into it. All right. In some some people are like well I don't wanna do that because I want the tax savings right. And that she short term thinking long term your gonna be much better off doing the Roth because as you kind of figured out randomly when you're asking that. It's never taxed. You put in money that's been tax and it's never taxed again. It's not taxed when you take it out it's not tax you're never taxed on the earnings that your your in the early boy crazy loophole it's it's not a whole thing. I guarantee you wouldn't somebody argues against that they're called loophole but but you know that's that's who along. Except for the fact that I didn't do it your prayer for this roster. But the reason I am thinking it feels like a loophole is that. We talked a lot about on the her money podcasts about compounding interest in the magic of time yup and so here you go with you've Roth IRA or 401K doo Hickey. And you've got the magic of timing your money may be doubled or tripled that. And I'm not gonna know attacks attacks for you meanwhile your your brother who did a regular 401K this worked like a dog ends up beating cat food that. If there I think it's too far but put you know hopefully. This message gets out because vicious message out it's because it's just a little complicated it's it's one of those things I was actually I was gonna talk last week and I made the point that sometimes simple stuff survives even if it's wrong. Yeah what I mean yes the example of people in my business people talk about you ought to earn as many stocks is a hundred mile assuring to your burned that. At 5800. My archery just fidgety dot exe should be 50% stocks and if your 7000 Marcia Regis dirty solution be 30% stocks. Well this is just basically complete garbage rule thumb but it's really simple. I can explain it I understand and so somehow it survives decades after everybody kind of knows it doesn't work. I read wants Chris let your ideal week is if you're five feet that's a hundred pounds and then you'd get. On ten pounds for every inch afterward nice and it turns out that's just something Cosmopolitan Magazine for just made up. Sort of storybook start simple and yes. Simple and it stuck in your hand yeah right soaks so things like Ross are complicated you don't stick your head as well also so I'm just gonna try to repeat this messaging for you. If you more than fifteen years from retirement there's no question do Roth IRA. Okay yes. You're in a higher tax bracket. While you're working generally better off than a regular IRA. If you're in the same. Or lower. I would be really weird making her being right lower tax or when your. But if you're about the same tax bracket when your working is when your retired due raw rough even if you're only two years from retirement. If you if you look at it and say look in retirement my tax first we really close to the same I do her office. All else being equal to Ross but you don't do Ross. Third or serves fortune you've taken out when you turn seventy. So here's a question for you let's say you work for a company that doesn't offer Roth option in the 401K. Can you go outside into the marketplace. And do Roth IRA. You measured as an individual are you allowed to do the. Absolutely. There are income limitations but they're pretty high I think you have to make less like a 170000. Dollars to be allowed to do that has to do it. Blood. It's a good idea here's what I would tell you. Don't do something crazy like. I'm well they they set on the podcasts do Roth IRA harmony to open a Roth Larry just stopped remarks forward -- to get you don't do that you don't just how particularly if your company's matching including free money and therefore you mean get the free money first that's come out. You know that's that's. The number one rule forewarned case in my mind. Understand the rules that your company has every plans unique undersea in the rules or your company and try to do your best to get all the free money you can't. OK so that would be the company match. Well that's the company match good a lot of cases employers who put some money in your 401K for you for nothing. Just for show not yet just for shoring up some companies also you profit sharing leaguers in your four or OK but you only get it if you're participating OK great so. I think you want to participate period. How much you participated as a whole mother comes Kirsch station right. But you wanna purchase that you wanna be in the plan and you wanna make sure you're getting all the free money that's there through them. Arch so hum this is like a prior episode were we talked about negotiating salary and understanding the value the benefits package had yes. So not all for a one K plans are created equal on so many levels. It's it's not even close I'll give you an example. I work with a company that has a 41 K for their employees and their very progressive company. What I mean by that is if you work fair and are eligible for the plan. They put 5% of your salary in your 401K for nothing. And the name match up to 10%. Hold you know how you of your salary so if you put in 10% they match 10%. Plus add 5%. So you've put in ten years 25% of your salary putting your 41 can doubt that they are hiring them yeah. Oh that's that's the extreme but it's a great company is you know it's one of those places that just really cares about their people into great benefit. But if you women looked at their salaries. What you see is there showers colonel on the low side compared to other things because they have some great benefits and that's just one of the benefits right. And that's like the conversation we had a previous episode about how. On don't fixate on salary because salary is not the wholesaler it's it's a piece of the story you have to get the whole picture. Let me go back to forewarned yes okay so. There's this magic thing that happens the calendar years that you turn seven you have to government says you've got to start taking the money out okay. So they have what are called required minimum distributions. It depends on your age what the distribution is and it's calculated every year OK it's not a very big. But they're gonna start teeth making take out a percentage every year does it matter where you take it from you know you could I can have six different. Firings and for gays and I can take all the distributions from one of them. So you don't if you had to make are are on guy who emailed Jan who has so grief Reyes for a forum on gay is terrible right. All of this let's say his minimum distribution for the year was 20000 dollars. He doesn't have to do it 20000 dollars out of eats no no no it's it's going to be one number he has to take. From any of them you tell us okay so this is screening is especially for millennial sewer changing jobs more frequently than baby boomers and you may have these multiple. Oral L Kellogg and you say this to millennial secure out there and in your person who has a job for two or three years in the news has another job in the news and how is another job try to combine your 41 case actually roll over you it's well there there's there's a couple of different ways you do one that you could open up an irate you could roll all of them into an IRA. That's okay that's an OK option the best option is when you moved from employer worn to employer to. Talk to employer to about your old forward K. Most of them will let you move your old forward okay into your new forewarned K and so that way this becomes like a retirement accounts that follow issue we just had our company was sold recently and that's what most of us do we rolled from our old companies for our own can tune you out. Yeah and was it easy. Guess actually okay. So usually it's only nick a couple pieces of paper kind of don't gone differently you know it's it's really not hard you just have to ask to do it. And and I think that too many people just don't take that step and I think. A lot of HR departments are Smart enough to say hello hi you're Newhart do you have an old forewarned Carrey you need to move and are forewarned is just not on their rate. Is there any reason that you might have it click in this case where you might have these multiple for a one case other than that you just didn't get around to rolling member is there any. Spanish and others number no benefit at all having all these orphaned or unless you know so much you can really convinced me that your old 41 K is just the greatest thing since sliced bread and you can get that anywhere else but see that's just enjoy it jerk. I've not seen that nobody's ever said to me oh look at this all forward can expect a spectacular. As I don't think our by the and of course when you leave a job any of the awesome benefits aren't enough for a one K don't follow you like they don't continue to contribute they don't keep putting money right you quit. We'll PO. Did you know so so here's what I would tell you I would think you make your life simpler if they're all in one place however if you're gonna keep them in two places I concede that. Keeping them in four places seems too much easier to manage this it was just kind of headache and I know you don't want to believe this shared but as we get older. We need things to be easier. Right who week we get older we kick confuse you hit it isn't happening yet known. Comes with my mom my senator at a technological gift for Christmas and she's like now where do I plug it in Fukuoka oh. Well no I won't. Do its knowledge technology everything as an older complexity is a big deal and so what I would tell you is Wally seven year old may be perfectly fine having three forewarned is an IRA. A 75 year old may not an eighty year old is very unlikely to only tell you what's the worst thing. If you get hit by the boss. And someone Haston tracked down and deal with she had any reaffirmed forewarned k.s an IRA. That's a lot of extra work. I didn't even think about that you're right because they all of those 401K accounts have beneficiaries. And all these legalities that are tied to it blew that's another great point cherry OK you leave these companies along the way you may very well forget who your beneficiary is if you had a 401K for twenty years ago who would the beneficiary of why excised end yes and what if you'd never changed it I would I would come back from the grave Chris. Chris with a thump the that. Those. That happens we actually have a client that this happened two years ago where he had divorced from about five years after divorced he died. And his ex wife was still the beneficiary. Are known as a little forewarning K plan. And there's nothing you can do about it the what is that deal is done it's it's done so yes so. If you leave this string of forewarned jays behind make sure you go back and checked the beneficiaries. That's another reason why might be good to keep them if you keep giving them swear word and Fordham to check this beneficiaries every once saw guys. I mean the big benefit to 401K. Is that. They're usually a little cheaper than an IRA is. What what do you mean by either cheaper only cash is that some people thinking it costs money to join this tour. It's all coming in nineteen. They're hidden fees OK but normally with a forewarned your company is paying industries. For you as part of the benefit right so. There are depends on your plan understanding your fees is important and I'm debt. Actually I know to once a year you get this thing that tells you about all the fees in your dad when I read it cover to cover yeah I'm sure it's taken its mix of jot down some question each then open your usual I would tell you I. I think obsessing over that is is probably going too far. Your company has a duty to make sure those fees are reasonable ma so. You know if you really don't trust your company you're digging in before going OK if if you work for good company a pro wouldn't worry about it that much you can look through and see if you think the fees are reasonable. You can have a financial advisor doable for the most part do it's it's pretty and usually not a. So do you typically have to worry about so if if Tom you happen to have d.s multiple 41 K counts and he didn't take the steps to roll them into one and you find yourself where Jim here is. Where you have a big 401K and three little satellite for a one case. Do you to ask this question again. Are you wise is to roll those for a one k.'s all and to especially the three little babies all in the one irate just immaculate fees here. Yeah I I would probably rolled to three babies in the one IRA. And then I would think about whether or wanted to leave the big one. Separate or not because I think too isn't that that rate could sure oranges it's it's just it's a lot to keep up with it and as I said. You really ought to be reviewing his beneficiary should really ought to be thinking about what's in your 41 K and if you do that or you do reporter for times. It's probably a lot to ask you do it twice more sure retired border and is this your copy right. Yeah watching CNBC looking at your feet he's still you would not you would not be the only one. A promise so here's a question I saw one time and it was a it was on some financial website. That there isn't a cure was it this is the quote there is never a good reason. To not participate in your company's 41 K plan do you agree with that you were false. Well I think I think it's faults but tell me what it's almost her so close this truly best suits their their their. Our reasons that you wouldn't participate but they would have to be a pretty extreme reason in my view so. If you were married in your in your spouse had a great 41 K plan. And the 401K plan at your work didn't have any bonuses. Meaning they didn't do matching the include money in their for for you didn't do any of that stuff. You can just say well it's hours doing compress spouse has won and we're just gonna put more into his or purse right. Think about if your spouse 41 K were they matched 101. In your forewarned cave they didn't match at all and you can only go forward. To really maxed out and want Max out Juan Williams back so the one. So I think that there are circumstances. Where you could say not do before going K but it would be really unusual. Is it ever choose ladies to jumped in late may be even working a job and my recent high eighty you need every penny you pay checking your finally the point where you go okay. I want to get in on this for a one K I just looked up one day and realized I'm not can work forever is never too late. Well no I mean participate you ought to be the you ought to feel like you can still do something even if you're he even if you were somewhere along time and haven't participated. It did get involved when you can see when you can you know what what I tell people all the time. Is. You're gonna look at and say I can't afford to take. 5% less hour 10% my salary imploded in this 41 K your bills or your kids are reserved new regular army standard you got all the stuff. What I would tell you to try to do is get something in there. So soon start with something. If it's I'm just gonna put the minimum they match. Jews that. But but start putting something in there if if they don't match anything I could still start putting something in there because here's the thing. Most people give to raise every year to where they give bonuses here in the car. And a lot of cases. That money can go into the forward to. So if you were gonna get a bonus for example you could tell your comptroller HR person. Just take out money and put it in my car and McCain doesn't want to commend to your paycheck depends on the plan of some some plans on what you know that some wall. But most every play and what you a couple of times a year changed the amount that your putting him. OK got it so if I give it a 5% race. I could say okay 5% raises 2000 dollars a year. I'm gonna put a thousand dollars of that move forward to now I've still got to raise rates sprayed. Well I've still got a race are feel like my paycheck out bigger but now I'm putting money into the four or K that. Kind of program were truly well and if you commit to it early in your career it's really powerful so you could start saving 2%. But then increase it by half a percent a year or a percent a year or something like that until you get up to. But a number that that feels a lot better before you know you're you're contributing. Ten purse. And things just feel a lot. What's interesting about that response to me Cruces that it really. In that oil response is the essence of so many of the things we talked to ban on her mind the and that is pay attention. Who practice a little bit discipline them and know that time is your friend if you take advantage or absolutely. And all of that applies to the 401K and the RA before we wrap up this their war in. Misconception. About the for a one K or the IRA that you encounter Rico it's like just make everybody listen to this and things. Yeah okay. There actually is when you started as an question I was like you know on them as your ashes like wait a second in as there is. A lot of people look at that forewarned K or their hiring and they're like that is my retirement or put them. That is not your retirement. A lot of people will not be able to retire off the money in their forewarned. Just sort of security. So if your whole plan for retirement is Social Security. You need to be thinking of more if you're whole plan for retirement is so security post forewarned your. Well maybe that's enough or maybe it's not that depends on how much you started saving and win. I mean that the example you used to somebody you really didn't serve early enough but insert sock in your way when you're down. You know a lot of times those people don't wind up with enough so just having these is not a retirement plan sitting down and thinking about it. How much money do are really need when I retire. Think about it five years at a time think about a ten years at a time the about a fifteen years at about don't wait until it's imminent it's imminent. And see your point jump into the plan and the savings at whatever level you can as soon as she can soon Michigan. So that's that's a really great handle on the 41 K and he said some things. That made me think he knows if you have this plan your spouse has this when you have to figure out how much to put him where to go and that's great. If you both can get on the same page and I you talk about money. What happens when you can't and that is something we're gonna talk about on the next episode of her money. Hey if you want more information about what we talked about on today's show weren't you just have other questions about money. This is our website it's WWW Doug Carol financial dot com. Or you can only should mean email whether it's through the podcast or through my website I'd be happy to help if I can't. Her money is sponsored by kuril financial practices in calling themselves financial advisor with Carol financial. The red not to retirement can be curvy confusing and public detours and stops but they are simply getting started approaching retirement for farm somewhere in the medal joining us very new series of workshops this spring. We college retirement. Simple for more information visit our website at Cheryl financial ducks come to her already podcast is just a tiny Sherry lynch and meet Chris Carroll. Our executive producers or new trial by a Jonathan many and Carol proteins are producers had to refer an hour technical director and editor is Billy black special thanks to him we Nestle and Marianne Edward. It's true information from this episode or to listen other episodes and subscribe to this podcast visit her money podcast dot com. Determining podcasts is now on Twitter. Follow us tweet us at her money podcast email us your questions at questions at her money podcast dot com. You can even use your phone's voice memo out to record your question. And email it to questions at. Her money podcast dot com and listen we might even played on the shelf. The Herman podcasts of production of inner come Charlotte and kill financial. Securities offered through security advisor networks LOC member finreg SIPC advisory services offered through Carol financial associates he can registered investment advisor Carol financial it's a teary advisor networks are not affiliated.