Birmingham, Alabama-based financial guru Jeff Roberts, who was recently named one of the top private wealth advisors in the nation by Barron’s®, came on Yellowhammer Radio to lay out the facts so people can decide for themselves.
The full conversation with Mr. Roberts can be heard on the Yellowhammer Radio podcast or in the video above, and a lightly edited transcript of his interview with Yellowhammer’s Scott Beason can be read below.
Subscribe to the Yellowhammer Radio Podcast on iTunes. Learn more about Jeff Roberts’ private wealth advisory practice at JeffRobertsAndAssociates.com.
Scott:
What are we going to talk about today, Jeff?
Jeff:
I’ve been preparing for our sessions and I started thinking that it might be a good use of our time together to go over issues that I see commonly as clients come in and work with us day in and day out. Bringing to the radio some of the issues that people commonly do wrong or we see people doing incorrectly. So to make it kind of a learning opportunity here on the radio. And Today in particular I thought we might tackle or spend a few minutes talking about rollovers of people’s 401k plans. I had a couple scenarios here recently where we were looking into 401k rollover for clients and saw some opportunities that people were perhaps about to do wrong. We thought, well let’s bring it out and see if we can learn something on the radio today.
Scott:
What are some of those things? I’ll tell you one thing you shouldn’t do, Jeff. Don’t cash out your 401k and use it to campaign for your first political office. Because that’s what I did with my retirement plan and that joker is long gone.
Jeff:
It probably is. I’m sure you had a nice tax bill that year as well.
Scott:
Yes sir, absolutely.
Jeff:
And that just leads into a point. As you know, if you take money out of a retirement plan like you just described, that means the money that comes out of a retirement plan like a 401k is then subjected to ordinary income so it’s taxed as ordinary income which means it could be in a tax bracket as low as 10% or could go up as high as 39.6% depending upon your household income. So ordinary income tax rates are high for individuals. And if you take the money out before you’re 59.5 years of age, not only do you have to pay taxes on that money at the federal and the state level but you have an additional 10% penalty which you have to pay for taking money out of a 401k plan before age 59.5. The reason why this is kind of an opportunity to learn from is we have people that are often times in job transition or career transition between age 55 and age 59.5. People wind down the ladder the later part of their careers and sometime companies come in and lay people off and who knows what other reasons. But we often see people that are in that age group in job transition. So let’s say that you’re over age 55 and you’re under 59.5. And 59.5 is that magical time when you can take money out of you’re retirement plan where you pay taxes but you don’t pay a 10% early withdraw penalty. What happens is, let’s say you’re 56 and you lose your job or you leave you’re company and you’re thinking, “I need to take my old 401k plan. I need to roll that thing over and put it in a n IRA account”. And there’s plenty of financial advisors that might advise you or encourage you to do that but there’s a reason why you might not want to. If you leave the money in the 401k plan at the company where you put the money in and you’re separated from service after age 55, you can take money out of that plan if you needed to, pay taxes but you don’t have the 10% early withdraw penalty. Normally if you take money out earlier than age 59.5 you pay a 10% penalty. You don’t pay a 10% penalty if you stay in the 401k plan, you’re separated from service after age 55 and you have to have $5,000 in the account. My point in all this is that don’t rush to rollover a 401k plan if you think you may be in a situation where worse case scenario you have to tap into that nest egg because of cash flow needs or lack of having a job or income or that sort of thing. Sometimes rolling over the 401k plan might not be a good idea.
Scott:
I hear “roll it over, roll it over”. That’s the kind of thing that’s a mantra out there among a lot of people. So you’re telling me that there are little caveats that I as a regular person and maybe other people, armchair advisors I guess, might be telling people that the reason I should come to you, Jeff, at Jeff Roberts and Associates is because there are these little things. Just like the tax code, there’s little things that may be out there and there’s a special way I can take advantage of it but since I don’t know it I can’t do it. So I could get myself in trouble doing one thing as opposed to doing something else.
Jeff:
True and it’s not that there’s other ways. There’s all types of options that people have and the idea is to set yourself up to where the best options are available for you. If you did roll the money over at age 56 and you put it into an IRA and you need to go get into the money before age 59.5 there is a way via 72T distribution which is a fancy terminology for a section of the Internal Revenue code that allows you to pull money out. If you do it a certain way or a certain period of time it’s less advantageous to people than leaving it in the 401k plan because it has some very strict rules that you have to follow about taking that money out over a period of time. So my point is this, you have options and so when you’re in a situation between age 55 and age 59.5 and you’re looking at a rollover make sure you’re talking to somebody that knows the rules because there’s pros and cons to handling it different ways.
Scott:
I think that’s so important. Talking with someone whose made a career that their business is what is best for the client, what is best for me. Not maybe what is best for the advisor or whatever. And that’s why I tell people to contact you, Jeff. Y’all focus on what is best for me. I know everybody is supposed to but y’all focus on what is best for us. Is there anything else that’s out there people just may or may not understand when we’re talking about retirement?
Jeff:
In referencing the 401k rollovers, we had a situation here recently with a client. We see this often where people have company stock inside their 401k plan so whatever company they may be working for, let’s make up a company ABC Company and you have company stock inside the plan you were given and a matching contribution or something you purchased on your own. When you go to rollover a 401k plan what you can also look at doing in some cases if the stars and moons align correctly, there are some cases where you might want to not rollover that company stock inside the plan into an IRA account. There are some situations where everything has got to line up just perfectly where it may make sense to employ a strategy called “net unrealized appreciation”. And we’re not going to become an expert on this over the radio today but the concept is basically this. If you had a certain dollar amount of stock inside your 401k plan and what you paid for that stock was a low enough amount, meaning the cost basis was low enough, it may make mathematical sense to take the money out in actual physical shares of stock that you can put into a non IRA account. You pay taxes and penalties on the basis of the stock but then the gain of the stock, which hopefully if you were doing the strategy there might be a bunch of gain in there, you would then later pay taxes on them when the stock was sold at longterm capital gains rates which are much lower than ordinary income tax rates. I know when you hear all this you’re thinking, “What in the world”, but the basics is this. If you have company stock inside a 401k plan don’t default to the fact I’m just going to roll all this stuff over into an IRA and sell that stock. There may be a strategy tax-wise where we can coordinate with you, your CPA, and our advisor to make sure that it might make sense to consider net unrealized appreciation. Sometimes it works, sometimes it doesn’t.
Scott:
Absolutely and the goal of the game is to do what’s best for you and your family. That’s why we need people like you, Jeff. Do you have anything else that you want to tell our listeners before we head to a break?
Jeff:
No but just one last comment on that. Anytime you’re doing rollovers in retirement plans if you have after tax dollars that you contributed into the 401k plan be careful of that as well. Because there’s unique opportunities to use those after tax dollars which you’re actually allowed to stick in your pocket and not pay taxes on or you can roll them into a ROTH IRA. We sometimes see people making mistakes in that direction for another opportunity. Several things with IRAs and 401k rollovers that people need to be thinking about and we’re always willing to help.
