Questions on questions! We answer 3 questions from our listeners related to IRAs, 401ks, and taxes...and then Jessie asks additional questions - as usual. (all from our TikTok!)
Are you thinking about rolling your 401(k) into an IRA? It’s a smart move for many reasons, and the best part—it’s not a tax headache as you might think. Here’s what you need to know.
It’s Tax-Smart, Not Taxing First things first, moving your 401(k) into a rollover IRA shouldn’t have the taxman knocking at your door. There are no immediate taxes due because this isn't a withdrawal; it's a transfer. It’s like moving your belongings from one house to another without selling anything.
The Steps to a Hassle-Free Transfer The process is called a direct rollover, and it’s pretty straightforward:
Keeping Things Separate If you're rolling over to a new 401(k) with a new job, you might consider keeping it separate from your IRA for simplicity. Remember, there's no limit to how many IRA accounts you can have, so don't feel the need to put all your eggs in one basket.
Perks of Rolling Over Here’s an insider tip: your new IRA provider might actually pay you to transfer your funds to them. It’s true—companies often offer a cash incentive for you to bring your business their way. Don’t be shy; ask about it!
Stay Informed Don’t just take my word for it. Dive into the details by checking out resources like the 'Rollovers of Retirement Plan and IRA Distributions' section on the IRS website. It’s always better to be informed.
Yes, You Can Influence Where Your Money Goes Most employer 401(k) plans come with the power of choice. You’re not stuck with a one-size-fits-all investment. Instead, you typically get to pick from a menu of mutual funds or other investment options. It's like being at a buffet and filling your plate with the foods you prefer.
Check Your Menu Each plan is unique, so the first step is to check your plan documents. You'll usually find a selection of around ten or more investment options. And if you're not sure where to find this information, a quick login to your plan's online portal should bring up everything you need.
Understanding the Default: The Target Date Fund Many plans automatically place your contributions into a target date fund. These funds are set up based on your estimated retirement year. They start off bold and stock-heavy, gradually shifting to a more conservative blend as you approach retirement. Think of it as automatic pilot mode for your investments, designed to provide a balance of growth and safety over time.
Customize Your Financial Journey Don't fancy the default setting? No problem. You have the freedom to switch to investments that match your risk appetite. If you’re the adventurous type, go for something with more stocks. If you prefer a smoother ride, look for funds with more bonds and fixed income.
The Trade-Off Keep in mind that safer investments typically don't soar as high but also don't dip as low. It’s a financial seesaw of potential risk and reward. The goal is to find the right balance that aligns with your comfort zone and retirement timeline.
A Note of Caution Before you make any changes, consider speaking with a financial advisor. They can help you understand the nuances of each option and how it fits into your overall financial picture. Normally these conversations are free! Have the conversation. Just call up Fidelity or wherever, do it.
When it comes to Individual Retirement Accounts (IRAs), diversity isn't just a strategy—it's a choice. And it turns out, when it comes to the number of IRAs you can have, the sky's the limit.
A Multitude of IRAs? Absolutely. Yes, you can have as many IRAs as you like. Whether you prefer the interface of one brokerage firm or the investment options of another, there’s no rule saying you can’t spread your investments across multiple IRAs. It's like having different tools in your financial toolkit—each one serving a unique purpose.
But Keep an Eye on the Cap While you can open numerous accounts, Uncle Sam does put a cap on how much you can contribute each year. This limit applies across all your IRA accounts, not per account. So, if you're contributing to four IRAs, like I do, you'll need to make sure the total contributions don't exceed the annual limit.
Why I Have Four IRAs Personally, I juggle four IRAs. Why? Because each brokerage firm brings something different
to the table. One might offer unbeatable research tools, another superior customer service, and a third might have an app that’s just too good to pass up. Having multiple IRAs lets me cherry-pick the best features from each firm. It’s all about personalizing your investment experience.
Let us know if you have anymore questions!
Jessie: You're listening to Market MakeHer, the self-directed investing education podcast that breaks down the stock market and answers your questions from her perspective.
Jess: Literally, because today we are bringing back a Q&A episode, this time with three IRA slash 401k questions from our TikTok.
Jessie: All right, let's get into it. Question number one comes from Hello2Jojo. Well, hello, Jojo. And she asks, how do you figure out taxes when you move your 401k into a rollover IRA?
Jess: Love this question. I have personally done this multiple times. First of all, any tax questions you have, we are not tax advisors, but you can go to irs.gov and find all the tax information that you need for everything tax wise.
Jessie: That’s a good idea.
Jess: It's also important to know that changes constantly. Okay, so first of all, if you do leave your employer, do not leave your account sitting in that 401k. Your employer has a ton of employees and has competitively chosen a plan for you and therefore has lower expense ratios for their employees. See it as an added benefit for you as the employee. They're going to offer you a match maybe, but they offer you this plan and that plan is inclusive of lower fees.
The second you leave that employer, you no longer get those benefits, which is those lower fees. Beware. If you want to roll it into your rollover IRA, we have a whole episode on the differences of account types, but you can put them potentially back into a 401k if you have a new employer and you can use your rollover as kind of your intermediary account. So it's important just to not commingle your funds if you do this. It's really simple. One, when you're exiting your employer, you call whoever that plan is with whether it be Vanguard or Fidelity, wherever. And you'd say, hey, I wanna go ahead and roll over my 401k. They'll help you with all of that paperwork. You have to open your Rollover IRA wherever your new brokerage firm is going to be. They will walk you through literally everything. They are required to give you all of your options associated with what happens when you pull money from your 401k. And they will make sure that it goes through seamlessly.
Now, they usually have to liquidate everything because you are in a plan and it comes in as cash to that rollover IRA, make sure that you invest it. But if they send it directly to your new rollover IRA account, so say your 401k was with Fidelity Investments and your rollover IRA was also with Fidelity Investments or another firm, mine was with another firm when I moved everything over and they send it over directly, it's not actually triggering you to do anything with your taxes. which is the most seamless way. It's beautiful.
But if you do, you're actually going to get two tax forms and you just match them up. It's called a 1099R, which is a distribution from a retirement account. And then you'll get a 5498, which is a rollover contribution to a matching like retirement account, and you literally just match them up.
Jess: and that's it. It's two forms and the corresponding will send it to you. So. My 401k, I left Merrill. I put part of it into an IRA at Fidelity. It was direct. I got the forms anyways. I got the 1099R and I got the 5498. But when I went to do my taxes and I used TurboTax at that time, it automatically filters in too, which is amazing because you can link up your brokerage firms. It didn't require me to even submit those forms or do anything. It was great. It was beautiful. But have them just in case. It's actually so simple.
Jessie: I was able to call up my brokerage firm and roll over my 401k into an IRA. And yeah, they walked me through the whole thing. I would suggest having a plan. Are you gonna put it in another target date fund? Maybe do a little research? You can decide what you put it into.
Jessie: So our next question is from Jane Carson, who asks. Can you control how your employer 401k gets invested?
Jess: Also a wonderful question. And Jane, you also give us so many comments and are so supportive. So I want to say thank you to that. And thank you for everybody who submitted questions. You can control to an extent. All 401ks are different. Some even have a self-directed arm associated with them. But if you have your normal 401k that doesn't have that self-directed account that you can attach it to, it's something like a brokerage services account, in which case,
You then have a world of investment opportunities opened up to you, much like the rollover IRA. It's like your little smorgasbord. Your employer has selected this plan and this fiduciary for you, whether it be Fidelity, Vanguard, Merrill, those are just the big ones that come immediately to mind. And you've got usually a list of like 10 investments that you can choose. You can control by adjusting it out of those 10 investments. Those are different roller coaster rides.
Jessie: Your 401k, your employer sponsored 401k is an amusement park. You have different rides you can choose to go on.
Jess: Once you go on that ride though you're on it.
Jessie: How many times you want to go on them is up to you. If you just want to do the hardcore rollercoaster over and over and over again, then fine. Or you can split up your time between some different rides, right?
Jess: Yeah, you absolutely can. Normally by default, it is the target date funds. Those do traditionally underperform the market. That's what I personally don't like them, but it really depends on where you are in your retirement journey and your risk tolerance, which also equates to literally your emotional level and what level of ride you're willing to get on. Even if they underperform the market, that means in every aspect. So, they don't go up as much as the market goes up, but they also don't go down as much as the market goes down.
Jessie: Like what we would call less risky. If your target date is a shorter amount of time for you, then it's probably going to be less risky.
Jess: Yeah. You choose your date of retirement. So, there's some risk associated with that. The farther out date until retirement, the more risky it's going to be. And then it goes on the risk scale where you have an allocation of bonds, fixed income products and equities. Others could be there. Normally it's a fund of funds. So there's a ton of mutual funds. So it's super diversified.
And it starts super risky on the risk scale with lots of stocks and then gets into bonds as you get towards retirement because that's going to offer you more of a steady income stream and you need to protect your assets more once you've grown your wealth. So, it is logically set up the way that one would rebalance and reallocate your portfolio and it constantly does that automatically. Those are the set it and forget it type of things. They are less aggressive.
And if they're less aggressive, less volatile, they will not go up as much as the market, but they also will not go down as much as the market. But that's why if you're younger, S&P 500 funds are fine. Those are normally in there. If you see like Admiral shares or something like that in your 401k, normally those have astronomically high minimum requirements, like $250,000, sometimes $2 million, and you can get really low expense ratios. That's some of the stuff I'd capitalize on.
Jessie: Oh, Okay. So this is also good to know when you start with a company and you know, they have a 401k. I don't even know if I did anything like when I got enrolled to my 401k at my corporate job years and years ago, I feel like I probably didn't pick anything. I don't think I did anything. So they must've just defaulted me into a target year.
Jess: You probably were. Yeah.
Jessie: Yeah. And they just based that on your age or something?
Jess: Yes. Which is good. Like I'd rather default me into that than cash.
Jessie: Oh yeah. Yeah. Say you have a 401k and you've been at your company for years and you're still going to stay at that company. Can you just roll it over into an IRA or something else at any time? Like, do you have to keep that 401k as long as you're working for that company?
Jess: You can roll it over as long as you're vested.
Jessie: Maybe they stop offering the match and you're just like, okay, well, I'm just going to roll this over into something else.
Jess: Sure. You can do it. You can do portions of it. There's lots of benefits of having a 401k. You know, worst case scenario, if you need to borrow money, you can borrow money from yourself.
Jessie: Yeah, you just get penalized, right?
Jess: No, you have to pay interest, but you pay interest to yourself. Comes out your paycheck.
Jessie: Interest to yourself. Say my 401k with a company is like $50,000 or something. And I need some money to fix my roof or whatever. Something happens. Do I have to put that money back in my 401k or?
Jess: Yes. Otherwise it's going to become a distribution in which case you'll be taxed on it. There are normally specifications within your plan. Know that I am not a tax advisor. We are not tax advisors, not financial advice, disclosure, disclosure. I really love our integrated disclosures. Yeah, I've done it before. Literally it takes two to three days to get the funds in your account. It's super quick. You can't take the full amount, but there's a portion of it. You can normally only have one at one time, but if it's like your first home buy, or… purchase or something like that, you'll have an interest rate and then just like a portion directly comes from your paycheck, it goes into your 401k. It's like that amount increases. So you're going to see less of your paycheck. but you are paying interest, but it's to yourself and it's not a taxable event.
Jessie: Correct me if I'm wrong here. Wouldn't you want to pay interest to yourself?
Jess: Yeah. Yeah, that's why if you need money, you should borrow it from yourself. Know that you're gonna reduce your paycheck when you do that. You're gonna get a lump sum, but your paycheck is gonna go down.
Jessie: So you can only do that while you're like having a paycheck going into it.
Jess: Yep, you have to be employed by that employer. Yes. Okay. And then if you leave employment, you've got to pay it back. or it's a distribution, you're gonna be taxed on it.
Jessie: I see.
Jess: There are some implications.
Jessie: Okay, that makes sense now.
Jess: You can pay it back early too.
Jessie: Okay. Jess: Yeah, but you have to have an active employer plan.
Jess: One of the benefits of that 401k. Yeah. Basically any investment guru that says, you don't need your 401k with your employer, just put it in a self-directed account. No, do not. There are benefits to having both.
Jessie: Okay. But don't leave the 401k after you've left the employer though.
Jess: Yeah, that's a difference. That's very different. That's very different. You're still employed. Get that match. Get those super low expense ratios because mutual fund expense ratios are not the same. It is agreement between the firm and the mutual fund company. So, expense ratios actually could vary depending on where you are.
Jessie: Well, especially if it's a bigger company, right? Because then it's like more people are pitching in to the basket.
Jess: I mean think about how that mutual fund makes money. It's an expense ratio based on assets under management. So the more money that goes into that fund, the more money that that fund is going to make. So, yeah if you're a bigger company and you are offering that list of 10 mutual funds, you might get a really low expense ratio because you're going to have a guarantee of a lot of people putting money into it.
Jessie: Okay, this is good. Keep all this in. People should know this stuff. And the last question comes from Books of the Dead.
Jess: The Drama. Whoa.
Jessie: And the question is, wait, we're allowed to have two IRAs? So, if I have a Roth IRA, can I also have an IRA in Robin Hood, for example?
Jess: Yeah, you can have as many as you want. I personally have four. Yeah. at separate brokerage firms. That does not mean that you can put in an astronomical amount though. So, there are limits to your IRA which change based on IRS rules that also change constantly and adjust. So, there are income limitations and there is a limit that you can put within any type of retirement plan. You cannot exceed that limit. Say the limit for simplicity’s sake is $6,500. You could put in 2,000 in one account, 2,000 in another, 2,000 in another. You can take this account and ACAT it over to that one. You can do whatever you want as long as you don't exceed those limits.
Jess: Yeah, you can have multiple ones. And I have multiple because I work in the industry and I work with all these brokerage firms and I like to know all their tools and resources hands on.
Jessie: IRA contribution limits are different than 401k though, right?
Jess: They are different, but they are all set by the government. And they're related to one another. Your income limits will adjust. So, if you do not have an employer sponsored plan, like 401k, and aren't eligible for one, you actually have a higher income limit to be able to contribute money into your IRA. And it changes. That's why I hate just saying it. But... It's a good problem to have if you make too much money and the tables change. And that's why we'll just give you the link in the episode equity.
Jessie: Yeah. Cause like IRA contributions went up to like 7,000 for 2024 already. Didn't they?
Jess: They did. You know, when I first started in the industry, they were $5,000.
Jessie: Yeah. It's been going up.
Jess: The step up was 5,500 if you were over 50.
Jessie: Well, we might need to rename this segment to questions on questions on questions. Cause I always have questions on top of the, the listeners questions.
Jess: Or. Can I ask you a question? Oh.
Jessie: No, I don't know what that is.
Jess: Oh my gosh, really?
Jessie: Yeah. What is it? No, I like literally Idea what you're talking about.
Jess: Oh my god. Okay. It's the Taylor Swift song and when she totally talked about
Jessie: Okay, I mean you got it. Yes, you got it in every episode I should have known. I don't know why I even like asked what kind of
Jess: I have no idea why you did. I was very confused.
Jessie: Yeah. I was like you could just literally take one Something from like the 90s. I'm like, what was that from? Okay.
Jess: No, I'm only listening to Taylor Swift I'm not kidding.
Jessie: It will never end Never end Goddesses… if you have a question, feel free to leave a comment on any of our social platforms
Jess: Let's keep building knowledge and breaking down those barriers. Toodles.
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