Transcript

Voiceover: [00:00:00] Welcome to Retirement Unlocked with Larry Heller, Your life Your Way, Unlimited Possibilities. Join us as we explore how tailored financial planning and investments can help you navigate life transitions with confidence. Let’s dive into this week’s episode.

Matt Halloran: Hey everybody. Welcome again to another Retirement Unlocked podcast with your host Larry Heller.

Today we’re diving into one of the most important decisions you’re ever gonna face in retirement, what you’re supposed to do with your 401(k). In this episode, it’s all about helping you make. Informed decisions about optimizing taxes, generating income, and how to integrate your 401(k) full financial plan and also into your estate plan.

We’re gonna look at rollover options, tax strategies like Roth conversions, estate planning considerations, and how to you use your 401(k) to balance growth and protection in retirement. Okay, Larry? So listen, we’re gonna dive into what to do with our 401(k). Where do we begin? 

Larry Heller: Yeah, so you know the 401(k) plan, besides maybe your house is gonna [00:01:00] be your biggest asset a lot of times, so you wanna make the right decisions when you retire.

What to do with the 401(k) plan? Do I leave it there? Do I cash it in? Do I roll it to an IRA? So what should you do with your 401(k) Matt? 

Matt Halloran: Dude, I don’t know what I’m supposed to do with four. This is why you get paid the big bucks, man. Where, where do we even begin?

Larry Heller: It is the big decision. So let, let’s start with four different re, four different, three major reasons and maybe a fourth reason here to really consider.

Okay. First one is, you know, should you keep it or should you roll it over to an IRA? We’ll talk about the distributions in a few minutes, but deciding whether you should keep it or roll over has some. Sub effects here. So in some decisions that can be made, for example. Is your 401(k) plan, do they have enough investment choices?

A lot of 401(k) plans. Obviously they only have a schedule list of some, a finite amount of investments. Mm-hmm. Are those investments [00:02:00] good enough? Are they limited? A lot of people in the 401(k) plans put themselves in a target fund, which we can talk about a little bit more. So you wanna see is are the investment choices going to work and maybe those investment choices worked when you are in accumulation.

Mode, but they may not work when you’re in distribution mode. So the first thing you really want to do is look at the investment choices. Next, you want to kind of look at each one of those investment choices and see what the fees are. So in a 401(k) plan, you’ve got fees for the ex. The expense ratio of the funds, but also managing the plan.

Some companies pay for all the fees. Some companies make the participant pay for the fees. So you wanna look at that and make those decisions on what you’re doing and whether you should keep the plan in the 401(k) or roll it over into the IRA. Another fact that comes into place is beneficiaries. Some 401(k) plans are [00:03:00] limited in the in their beneficiaries, especially when it comes to designated a trust for a minor child.

And the last thing is employer stock. Ah. So this is important if you have employer your stock in your 401(k) plan, because you do get some special treatment called net NUA. We’re not gonna go into that today, but there is some special treatment for the unrealized appreciation that that stock may have. So those are really four factors.

That you really wanna dig into and look into and, and, and see what they are. And if you are gonna work with a, an advisor such as myself, there is now you are required to kind of do an analysis and compare what the analysis are. It’s not just the cost factor, it’s some of the other. Other items that come into play.

I know with, with us a lot of times when, when we take clients on, there are some things that you can’t do in a 401(k) plan. There are some private investments that from an income standpoint are great solutions in retirement that just not available in a 401(k) plan. So, [00:04:00] uh, so really look into your plan, really have some good discussions and try to figure out should you keep the plan or should you roll it over into an IRA.

Okay. Of course, rolling it over into IRA. You wanna make sure you do it properly, because if you roll it into an IRA, you don’t pay any taxes on it. If it’s done wrong and we’ve seen it happen before, there could be some tax hits, uh, associated with that.

Matt Halloran: I’m gonna get historical on you here. Just, just for, uh, giggles for the audience.

You and I have done podcasts on the fact that Heller Wealth Management does 401(k)s for businesses. So you got an existing 401(k) client, they’re approaching retirement. Would you mind just. Sharing with us some of those considerations. I mean, you just outlined those four things, but how do you have that conversation with that plan participant to help them make the best decision?

Larry Heller: Great. Great question, Matt, because that’s a perfect example. We can look at our 401(k) plans we provide, and then also [00:05:00] for the role of, so our plans, again, we will look at the cost. A lot of the funds are the same. Fees, expenses may be the same that we’re using, but one in our 401(k) plans, we don’t use some of these alternatives I was talking about because they’re not fit for a 401(k) plan and they may be a good fit for someone in retirement looking for some, some income on the lower end of the risk scale.

So that’s one of the reasons why we look, why we look at that, and we would suggest. Possibly rolling that over into an IRA plan. The second one, like I said, was the cost. Mm-hmm. You know, we design these plans and we monitor these plans, but every company is a little bit different. A lot of companies pass on the annual administration to all the participants.

Some companies are nice enough to pay for some of that administration, so you really have to look and see, is your company paying for that or are they passing that on onto you? So those are. Really the two biggest factors when we, when we look at [00:06:00] it, is the options that now we can do versus in, in an IRA that we can’t do.

We don’t wanna put it in a lineup in a 401(k) plan.

Matt Halloran: Now, you right now are, I mean, you’re not retired, but you’re hanging out in the Hamptons right now. You’ve got your family coming out. You know, when people are watching the video, they’re like, Hey, Larry doesn’t look like he’s in the same place. And so there are a lot of considerations that you need to take, uh, when you are deciding what to do with your 401(k).

And I don’t think the Hamptons is a tax efficient withdrawal strategy. Uh, but uh, it is, you know, when, when you are talking about what you’re gonna be doing in retirement, this is a huge component. So let’s go there.

Larry Heller: Absolutely. If you’re lucky enough, maybe you can retire into in the Hamptons if you come and work with us one day.

So we’re we, we’re out here just for the, for the month and working vacation, I’ll call it. So, uh, so we’re doing one or two podcasts. We’re out here. Nice little casual environment. I’m looking out at the water as we speak, but I’m coming to you with some important information on your 401(k) plan in [00:07:00] case you are about to retire.

Yep. Um, so one of the things we just talked about, the differences in rolling them over, but the other one is how do you manage taxes and how do you manage your withdrawal strategies? So these are two big factors. So first thing is in your 401(k) plan, do you have all traditional 401(k), so that, that is, you put money away pre-tax.

So now when you decide to take money out. You have to pay the piper. So you have to pay the government taxes or did you put put it in a Roth 401(k)? Not, not. Not all plans offer a Roth 401(k) plan option, but if they did and you put all, or some of you in that Roth, now you’re in a little bit better position tax wise.

’cause if you pull it out, you don’t have to pay taxes on. Either way, there are some things to consider because the withdrawal strategy comes into play, and this has become such a huge, huge planning step, and so many times that [00:08:00] I’ve seen overlooked, and we did a separate whole podcast on this where I call kind of the donor hole between when retired and your required minimum distribution.

Mm-hmm. So. Secure Act 2.0 made you have to take out your four oh start to your RMDs now at 73, unless you, if you were born in 1960 or later, then it’s 75, so could be many years from when you stop working, whether it’s in a 401(k) or whether you rolled it over into an IRA before you have to take these requirement minimum distributions.

And what tax bracket are you gonna be in? Will these. 401(k) grows a compound and keep compounding that it kicks you into a much higher tax bracket down the road. So one of the things, one of the strategies you may want to consider is when you’re rolling over to an IRA, do you wanna do a Roth conversion strategy or a partial Roth conversion strategy when you may be in these [00:09:00] lower income, lower taxable years before you have 8 73?

So this is a, a complicated thing. Almost all accounts I talk to, they don’t get involved in this. This is kind of what we do, but if, if it’s too late, we’ve had clients come into us later on and they’re about to take their RMD and they’re in a 30 plus bracket and they’re complaining. They have so much they have to pay in taxes and we look at the taxes returns from the last.

Few years and they were in such a low tax bracket and they’ve lost that opportunity. It’s gone. So you wanna do, start doing this planning right before you’re retiring, but especially in those earlier years that you’re retiring

Matt Halloran: now, coordinating all of this stuff with, with all of the other aspects, social, security, other things.

How, how does that. Come into play.

Larry Heller: Yes. So just what I said, if you were now stopping to, to work mm-hmm. Maybe you haven’t taken your social security yet, right? Or maybe you’re not eligible for a, a [00:10:00] previous pension, you can defer that a little bit more. So knowing and putting a strategy, a sequence strategy together on how you’re gonna take money out of your retirement accounts and your other accounts.

Coordinating that with your income streams to minimize your taxes. Obviously if you minimize your taxes, Matt, you get to keep more money. Yes. So if you, if you don’t kind of put a strategy together or just kind of say, you know what, I’ll, I’ll live off social security early, and then later on I’ll take my required minimum distributions.

You may end up costing yourselves thousands and some instances, hundreds of thousands of dollars by not planning properly on the tax efficient withdrawal strategies from your 401(k) or IRA.

Matt Halloran: Now a lot of people when they have a 401(k) as you know, ’cause you run 401(k)s at Heller Wealth Management, it, it’s kind of a set it and forget it.

You just kind of have them there and you’re making your [00:11:00] deposits every paycheck. That’s something that you really want to consider when you’re getting closer to retirement because that’s set it and forget it approach. Doesn’t always work.

Larry Heller: Yeah. So now you want to start looking at, well, you always really should have looked at what your asset allocation is gonna be, but if you had a longer term time horizon before you needed to take the money, you can have a little bit more risk.

But now as you’re getting closer to retirement, you may need the, the take the income from this to live. And we know you’re gonna have to take some of it when you hit your acquired minimum distribution age. What’s the right allocation that you should have in your portfolio? How much should you have in equities?

How much should you have in, in fixed income? And then how much did you have in cash? Yes, cash, because you may be withdrawing money down you, the money you take out of your 401(k) plan that you’re gonna. Need to live on. You may not wanna have risk if you’re taking money out in the next few years. So knowing the [00:12:00] right portfolio allocation for you based upon your income needs, your longevity, your risk tolerance is extremely important.

I’ve heard

Matt Halloran: a lot of advisors talk about. The lack or the need for liquidity? How does that apply?

Larry Heller: Yeah, so we’ve, you know, we’ve done these reservoir strategies and we’ve done these podcasts. I think episode 119 is great, great podcast. On the reservoir strategies we’re putting together, we call it income buckets.

So you have enough liquidity and flexibility. Now you wanna use if. If you have outside retirement money, some of that, you want to combine that with your current retirement money, because again, if you are retiring in your sixties, hopefully you’ve got a 30 year runway. So you wanna have some type of growth, but you also want to create some type of income buckets based upon the different time horizons that you have [00:13:00] and based upon the the expenses that you have.

So making sure that you have the right liquidity, the right flexibility, and a strategy for not only year one, but year two all the way through long term is extremely

Matt Halloran: important. Yeah. If you all haven’t listened to episode one 19, I, I mean it really is one of those huge differentiators between what Larry and his whole team at Heller Wealth Management do and, and what you could be getting from your other advisor.

Okay. In the opening, we were talking about how there can be some, uh, estate planning considerations that you might not be able to have the same level of flexibility if you keep it in your 401(k). Let’s go there.

Larry Heller: Yeah, so there’s so many things about these beneficiaries. So just going back to some basics on estate planning, because a lot of people get confused that everyone says, well, I have a will.

So my will’s gonna govern where my assets go, and that’s what most people think. I’ve actually had a client come in one year with [00:14:00] multimillions of dollars and I started asking him, que oh, no problem. My estate attorney, he actually had a book, man, this is years ago, a book this stick with everything in his wills and trust and everything along those lines.

And I said to him, do you know how much this is really gonna go? Through. And he, he, he said, no. Well, I said half of it doesn’t go through because you’ve named different beneficiaries in your 401(k) plan than you have in your wills. So you might have wanted money to go to children in different percentages, but you didn’t say that in your, um, 401(k), but he flipped out.

He, he is like, why didn’t my, my attorney tell me that I had to change it in my retirement accounts? So it’s critical. To look at your beneficiaries and your retirement accounts because that they’re not governed by the, by the well. And I can tell you plenty of stories here. We’ve had beneficiaries, um, who have named their ex-spouse and never changed their ex-spouse.[00:15:00]

We’ve heard stories where somebody’s died and they didn’t change their ex-spouse along those lines, so, or people going through a divorce. We just, uh, unfortunately I just heard it, you know, a, a, a sad story, but somebody was getting divorced, the divorce had not gone through and in their 401(k) plan, they named their soon to be ex spouse as the bene, as the beneficiary.

And they did not change that. Where they would’ve might have liked to change that to their children in a trust for it. So knowing who the beneficiaries are and, and preparing properly, especially if you need minor children. A lot of people put mm-hmm. Put a minor child. Maybe not as a first beneficiary, but a secondary beneficiary.

And, and God forbid there’s a, a common disaster, well, that child can’t get the money if they’re a minor, but when they turn 18, they sure can. And I don’t know about you, Matt, but I don’t know. [00:16:00] Uh, I wouldn’t want an 18-year-old to get a big chunk of money at that particular time. So making sure, and there are ways of doing this and.

Protecting in there. So making sure that the beneficiaries are set up properly in a retirement plan is so critical.

Matt Halloran: Now the other thing that I think is, is wildly important, and I know you do a lot of charitable and legacy strategies, can, can you do stuff like that in a 401(k)?

Larry Heller: Yeah, so there’s, there’s a, when you reach your retirement distribution, there are things called qds, qualified Charitable Deductions, um, so that you can do and set up.

So you may, that, that may be a way of. Reducing your income and giving gifts instead of giving gifts through your outside assets. So by doing this, you may reduce your taxable, more taxable income even further. So we’re gonna have an upcoming podcast, so it’s a great lead. I think it’s may even be our next [00:17:00] podcast where we’re gonna talk specifically about charitable giving as a tax and legacy strategy.

Nice. Um, I do wanna go back and just talk about the beneficiaries. One thing I forgot to mention. Okay. It, it that, it makes it even more critical on that is the secure act changed the, the, um, distributions for inherited. So if other than a spouse, if your name, a child as a beneficiary, um, even an adult child, they have to take money out over 10 years.

So planning for that, planning for Roth conversions, trying to figure out what the tax brackets are gonna be, it’s makes a little bit challenge, where in pre the secure 2.0 act, you were able to stretch that amount over that life expectancy that’s no longer here. So that’s another planning factor, especially in your retirement.

You wanna start planning this out. We have a lot of clients. They’re, they’re real lucky. They have a lot of money. And this retirement account, they’re not really using that in their mm-hmm. Life. [00:18:00] So now that’s money that’s gonna go to their children and maybe their grandchildren. So how do you do that? How do you plan for that?

And so there are certain things that you could do, uh, under kind of the, we call the estate planning side, but basically on the beneficiary side as well.

Matt Halloran: Alright, let’s, let’s bring this home. What are some of the big key takeaways that you have from this episode to make sure that the listeners will at least consider when it comes to their 401(k)?

So the first thing is just

Larry Heller: align your 401(k). Is your 401(k) still the best investment vehicle for you? Is it serving your goals? Or should that be rolled over into an IRA? So that’s kind of the first thing that we talked about and all the different options in there and, you know, comparing the investment options and the fees and all of that comes into that consideration.

Um, the second thing is, you know, coordinating your withdrawals with a much broader. Income plan and tax strategy plan and consider possibly Roth strategies, but consider the proper withdrawal [00:19:00] strategies in your retirement plan. So critical. We spend so much time planning and going through this that is such a key factor of what we do, and showing you the difference in the tax amounts that you can save over your lifetime.

And finally just allocating the strategies, having the reservoir strategy in place to align your goals, your income, what you need at your age and your time horizon. So, um, I hope that all this people have kind of really listened that this is such a critical aspect of your retirement and your lodge 401(k) plan and your IRA is so crucial, um, to your retirement plan.

Matt Halloran: Larry, if anybody who’s a business owner who wants to talk to you, or if they have their 401(k) and they’re getting close to retirement, where should they go and what should they do? Yeah, so they can

Larry Heller: go to our website hellerwealthmanagement.com and they can click right on there and schedule a, an appointment with myself or one of the other advisors at the firm, or feel free to give us [00:20:00] a call at (631) 248-3600.

Matt Halloran: Alright everybody, thanks for tuning into this Retirement Unlocked episode. If you found this episode helpful, make sure that you not only like share and comment, but please, please make sure that you’re sharing it with other people. If you know somebody who’s getting close to retirement, this is a vital, vital podcast for them to listen to, to make sure that they don’t make very, very costly mistakes.

And if you do want ’em, take the next step. Uh, all you have to do is uh, click on the link in the episode description or in the show notes and there is a link to Heller Wealth Management, where you can do exactly what Larry was just saying. Let’s just schedule a free consultation with somebody on the. Or team, your ideal retirement starts with a conversation.

So let’s get started. We’ll see you next time on Retirement Unlocked.