Announcer:
It is time now on KROS for Financial Focus, brought to you by NelsonCorp Wealth Management. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives securities offered through Cambridge Investment Research, Inc., Registered Representatives, Securities offered through Cambridge Investment Research Inc., a Broker Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor, Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. Now, here’s today’s Financial Focus program.
Nate Kreinbrink:
Good morning and welcome to this week’s Financial Focus brought to you each and every Wednesday morning right here on KROS. Well, this is Nate Kreinbrink bringing you today’s program, January 31st, last day of January. We can officially put this one behind us. I think you can say it has been a typical Iowa/Illinois/Midwest January, starting off after Christmas there, mid-40s, maybe pushing 50. Then obviously we had that extreme cold and close to about a foot of snow, wind, fog, rain. Now we’re looking at the extended forecast into obviously middle/end of next week still hitting that 40s, maybe even pushing upper 40s for a couple days. Again, take it while it’s here. A lot of the snow is starting to melt away, which is a good thing. We will be into February and moving the year right along closer to the warmer temps and hopefully put winter behind us for the year.
January, at the end, is always an exciting time. I know wrestling for boys and girls in the area, basketball seasons are starting to wind down with the crammed in of all the makeup games. Hectic schedules here to finish out, but kind of an exciting time on that front. You see individuals who’ve worked so hard put a tremendous amount of hours in, get that ultimate goal as far as punching their ticket to State, whether it’d be wrestling, basketball or whatever they’re involved in. Again, as the season winds up, I want to wish all the local teams best of luck as they continue on to that path when they go there. Seeing baseball season is just a couple weeks away as far as pitchers and catchers reporting. Again, that kind of gives that new, I guess, excitement if you’re into that, as far as baseball season, warmer temps, summertime, and all that brings. So we are getting close. We are getting close.
For today’s program, I know Andy Ferguson with NelsonCorp Tax Solutions was on the past two weeks. We talked taxes, talked filing. You’re to a point where you should be getting the majority of your tax documents in the mail. Some of your investment accounts may be a little bit delayed due to those 1099s being sent out at a later date due to dividends, interest, that type of stuff. But again, as you do that, get it in. As he always says, if you have a question if you should bring it in, throw it in there, let them be the one to say, no, you don’t need it. So it’s easier to get rid of it that way than to have to wait to go find it again and bring it back in. But tax season is quickly approaching. The 29th was the first day that you could actually file, so tax returns can be officially filed now. If you bring them in, and, as he says too, if you got everything, bring them in, don’t wait. Your tax preparer will definitely be thankful for that.
With today’s program, I wanted to switch gears a little bit. Had a few questions come up as far as individuals when they leave a place of employment and what to do with their retirement plan that is still being held at that previous employer. A lot of times, what usually happens, you leave employment, that retirement plan stays at the old employer inside of their plan. You move on to a new place of employment. You start your retirement plan at that new place. Now you have multiple ones in different locations to, one, try to keep track of statements and all that with it, which, again, is perfectly doable. You’re able to do that. It is an option that you can do.
But I think a lot of times it happens that way by default when people just don’t know what they can do with that old plan, so it just kind of stays there. If they do move to a couple different jobs, they’ve got three, four, five different plans that are hanging out there that they’re trying to keep track of, manage, know what’s invested, and follow along with some of them. Just wanted to spend some time today talking as far as what your other options are besides just leaving them in the plan.
Now, if you do leave them in a plan of a place of previous employment, you can’t make contributions to it if you’re not a member of that plan. Obviously, there’s no company matches going in because you’re not receiving a paycheck. You’re still able to manage it, still able to change investment options. If you had a login to an online account from that plan, you’re still able to get in there, see what’s in there, make changes. You just simply can’t make any ongoing contributions while it’s still in that previous company’s plan.
When you do switch jobs, you do have a couple options. Obviously, leaving it there, you are able to roll that over to your new company plan if they do accept it. Not all companies do. The majority of them will accept that new plan. You just roll it from your old employer’s plan into your new company’s plan, and now you’ve got to consolidate it a little bit. Obviously with being employed there, you can make ongoing contributions. Company matches get put into them. You manage it the same way you can as well.
Another option that people oftentimes discredit, I guess, is you’re able to then take that old previous employer’s plan, roll it over to a Roth account or an IRA account depending on what type of funds you have in that old account. Different options as far as what you’re trying to accomplish with that as far as pros, cons. Usually if you roll it over to an IRA, you’ve got a little bit wider variety of investment options as far as what you can invest in, what you can look at it.
When you’re inside of a company’s plan, you’re limited to the investment options that are available to you in that specific plan. Usually there’s about 15 to 20 different funds that has been chosen inside of your 401(k) or your 403(b) plan with your employer, and then you have to pick between those menu of funds as far as how you want your money to be invested. It’s fairly common, too, to see a majority of those 15 to 20 funds being target date funds coinciding in there as far as what you’re able to do, but sometimes you want to have exposure in different areas that might not be available. You’re able to then roll that over to an IRA or a Roth account if you do have Roth money inside of that plan. Outside of that, then it gives you, like I said, a little wider variety of options to be able to manage it, to be able to do things with it. You’re also able to then look at Roth conversions if they make sense, a little easier than maybe what would be done inside of your plan, depending on what your tax situation looks like and if it would make sense from that way.
Again, looking at old money, you obviously can take a distribution. You can just have them pay you a check normally. Then if you are under 59 and a half, that money, if it’s pre-tax, is going to be taxable to you. Again, a 10% penalty applied for that distribution because you are under age 59 and a half. Again, usually not the wise decision to make. It’s expensive money to do that, but it is an option to do it. Rolling it over to a new company’s plan, rolling it over to an IRA or Roth account outside of the plan or obviously just simply keeping it with the old plan if you’re allowed to. Now, with leaving it there, sometimes if it’s below a certain amount, they may force it out of their plan. If so, they’ll give you a notification letter, and say, “Hey, you’ve got to do something with this. If not, we’re going to transfer it to an IRA outside of our plan that you would have.”
Again, all different things. Just look at any communication that is sent out to you in order to understand what your options are with that. I guess then the other thing then is when you retire, what do you do with your old plan? Obviously, some of those same options are still on the table for you. You can take a distribution. If you’re over 59 and a half, you may not be subject to that 10% penalty. However, if it is pre-tax money, it’s still going to be taxable to you come out. If you take it out after age 59 and a half when you retire from that. You can also obviously leave it in the plan. Also then looking at rolling that over to an outside account, being able to set up cash flow as far as to continue to fund that retirement when you do retire and don’t have those wages.
A lot of times when you look at these options, again, it’s overwhelming to people. It becomes one of those things, you’re like, “I don’t know. What is the best route to do?” Then simply there, as we always say, it depends. It depends what you’re trying to accomplish, what you’re trying to do from a cash flow standpoint. If there’s any other cash flow coming in, where we would want to look at bridging that gap between any pension, social security. Anything additional as needed, where are we looking to get that from? So that is your 401(k), 403(b)s, your retirement accounts at work, what we’re looking to do with that.
Pension plans, on the other hand, are a little bit different as far as what your options are at retirement. A lot of plans offer a lump sum option from any money that is inside of a pension plan. Rather than being sent a monthly check based off your election, you can basically just do a rollover of the entire amount that has been put into the account in your behalf. Roll that over to an IRA account. Now you have discretion on it. You have the ability to control the amount and timeliness of any distributions from that. Whereas if you make the monthly elections or if your plan does not offer a lump sum option, you’re then required to make an election as far as how you want that paid out. Do you want it paid out on just your life? So every month that you’re alive, you are going to get a paycheck. When you pass away, the payments are going to stop.
Or if there’s a beneficiary, a spouse, you can elect to have a payment continue on to them should you predecease your beneficiary. For instance, if you put your spouse on as 100% joint payout, you’re going to get the full amount when you pass away, and if your spouse is still alive, they’re going to get 100% of what you were getting as well. Now, that payout is going to be a little bit smaller than what you would do if you would just pay it out through your own life because essentially the pension plan is paying this thing out for two lives, so, in essence, that payment is going to be a little bit lower than what it would be for a single life. Again, a lot of times that makes sense. The reduction isn’t as drastic as people think to make sure that a surviving spouse is taken care of.
Again, this is all decisions that can’t just be looked at with blinders on, looking at making that decision solely on its own. It needs to be tied into what other assets we have. When are we filing social security? Where are we looking at it from a tax planning standpoint? Making sure that all these decisions coordinate with each other. Having a plan as to when we are doing something, not just reacting and making an unknown decision because, again, sometimes that may not always be the best. So as you get to these milestones in your life and you have to make these decisions, you get those packets sent home to you, the 50-page packets, and you’re like, “I don’t know how to do this,” make sure that you get with somebody that can help out with that to ensure that, again, you are marking the right box, making sure that we are making it go to where we want to and not be taxable if we are not expecting that.
Before I do run out of time, I did want to mention that, every Friday, NelsonCorp Wealth Management is wearing jeans for charity. Money raised in the month of January will be donated to The Adopted Closet in DeWitt. Again, this is Nate Kreinbrink with NelsonCorp Wealth Management, bringing you this week’s Financial Focus. Thanks for tuning in and have a great rest of your week.
Announcer:
Financial Focus is a production of NelsonCorp Wealth Management in Clinton and Davenport. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives securities offered through Cambridge Investment Research, Inc., a Broker Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor, Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. For more information, visit our website at www.nelsoncorp.com.