In this Episode of the Secure Your Retirement Podcast, Radon and Murs discuss the essential rules and considerations surrounding your 401K as you approach and surpass the age of 50. Age 50 is a pivotal milestone when it comes to retirement planning, with key changes in contribution limits, withdrawal rules, and rollover options that can significantly impact your financial strategy. Understanding these rules can help you optimize your retirement savings and avoid costly mistakes. 

Listen in to learn about the benefits of catch-up contributions, how to navigate the complex rules for 401K withdrawals after age 50, and the strategic opportunities available for Roth IRA conversions. Radon and Murs provide actionable insights to help you make informed decisions, ensuring your retirement documents are up-to-date and aligned with your financial goals. 

In this episode, find out: 

• The significance of catch-up contributions for those 50 and older. 
• Key withdrawal rules after age 59 ½ and how to avoid penalties. 
• How to take advantage of the age 55 rule if you plan to retire early. 
• The benefits and considerations of rolling over a 401K to a Roth IRA. 
• The importance of reviewing and updating beneficiary designations in your retirement accounts. 

Tweetable Quotes: 

• “Turning 50 opens up new opportunities in your 401K that can significantly boost your retirement savings.” – Radon Stancil 
• “Don’t overlook the power of catch-up contributions; it’s a chance to make up for lost time and enhance your retirement fund.” – Murs Tariq 

 Resources: 

If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement! 

Radon Stancil: Welcome to Secure Your Retirement. We are certainly happy to talk with you today on a topic that probably affects most people. First and foremost, a 401k. A lot of people have 401Ks, and I would almost venture to say most of working Americans have a 401k plan, or at least availability to it. And so on this one we wanted to talk a little bit about though the rules associated with a 401k after you turn age 50. Now, the reason why we want to hit on these topics after 50 is some of the plans change. The rules change when I hit 50, and so we're going to walk you through these different sections that'll help you to understand what are your opportunities. So while you may go, "I'm not that excited about being 50," it gives you something to look forward to when you turn 50. To make these things work for you a little bit better. So we're going to take one section at a time and Murs is going to start off with here with section one.

Murs Tariq: All right. So the first one and the most glaring when you turn 50 is you get into a category of what's called catch-up contributions on your 401k. So 401Ks, pretty much all retirement accounts have limitations on how much you can put into them, and they're set by the IRS and the plans themselves. But when you reach age 50, they give you what's called a catch-up. So the idea being that maybe if you started planning for retirement a little bit later in life and you need to be able to dump as much money into these retirement plans as possible in a short period of time, they give you the ability to do a little bit more into the plan so that you can catch-up on your retirement planning.

Which leads me to, well, what is the benefit of utilizing the catch-up contribution? Well, number one is, like I said earlier, if you're behind on planning or you feel like you're behind on planning for retirement, this is a nice way to add more into your accounts if you're able to. The other benefit of it is well, all dollars that go into the traditional 401k are tax deferred, which means it lowers your tax bill for the current year that you're in. So the more you put into the traditional 401k bucket, the less that you're going to be taxed on your salary. So there's another advantage there. And then just obviously getting more into the world of investments is going to give you the best chance for success for a long-term investment perspective. So understanding that is good and paying attention to that. A lot of times we forget that we can do more and we just coast. We say, hey, we set it at 10%, it's been at 10% for the last 20 years. Pay attention to how much you're contributing, especially when you turn age 50.

Radon Stancil: All right. Our next section is understanding withdrawal rules after age 59 and a half. Now, you might think that's a weird age and it is. We don't know how and why they came up with the half. But once I turn 59 and a half, there are some new rules that apply with most plans. I would not say every single plan, but I would say 99% of plans allow for some differences about what I can get access to from my 401k. So let's just talk about before 59 and a half. Before 59 and a half, if I take money out of my 401k or my IRA for that fact, I have a early withdrawal tax penalty of 10%. So I would have to claim it as income and get a 10% penalty on top of that. So that means if my tax bracket were, say 25%, I'm going to get another 10% on top of that so now I'm having to pay 35%. So it's not advantageous to take money out prior to 59 and a half unless it's an emergency.

But after 59 and a half, most plans will allow for what's called an inservice rollover or an inservice distribution. So inservice, think about that, means I'm still working, I'm still in service with the company. So after 59 and a half, I can do a few things. I could take my money from the 401K and I could do an inservice rollover, for example, to an IRA. Well, why would a person do that? A couple of different reasons. Maybe you want professional management. You want to have a financial advisor that's going to help you with those funds. Maybe you want more options for investment purposes. Maybe you just want to be able to have a little bit more access to the money. So there are a few reasons why somebody would move their 401k to a traditional IRA.

Now Murs, when he gets to another section is going to tell you a whole nother reason why you might like the 59 and a half rule. So I'm going to let him have that one on that particular part of things. Just remember 59 and a half opens up some options that you would be able to transfer money out of the 401k. And by the way, when you do that, your 401k still stays open, you still can contribute, you still can get a company match if you get a company match. And so what a lot of our clients do is after 59 and a half, they will do an inservice rollover. They'll continue to put money in, and then each year will do that balance out to get it into their IRA so they can get professional management.

Murs Tariq: Okay. Radon just explained the 59 and a half rule. Prior to that I talked about 50 with catch-up contributions. I got one more age for you and that is age 55. This one is really important if you're planning on retiring early or maybe if you are going through a layoff or between jobs. The 55 rule in the 401k is very important and often overlooked. So what this 55 rule allows for ... Radon just talked about 59 and a half. After 59 and a half, you're able to avoid any early withdrawal penalties on your withdrawals on a 401k plan. But at age 55, if you left your job and we leave the account in 401k status ... So in this case we're not rolling it to an IRA. We have left our job, we were laid off, whatever it is, and we leave it in 401k status. The age 55 rule allows for you to take withdrawals on that 401k, only that 401k account, without any early withdrawal penalties.

Early withdrawal penalties are 10%, so we absolutely want to avoid those. And so being of the age 55 and up and still retaining that 401k status of that employer plan, now we can take withdrawals. We're still subject to taxation. A lot of times that gets confused. Penalties and taxes are two different things. We avoid the penalty on this 401k withdrawal if we're above the age 55. We still have to pay the income tax that's going to be generated off of these withdrawals. How this comes in handy? Again, if it was unexpected layoff and you need cash, you're above the age 55 and you need cashflow to pay the bills and keep your life moving while you figure out what you're going to do next. Or maybe you've been a really good saver and it was part of your plan all along to retire at 55 and a lot of your assets are in retirement plans and pre-tax assets that are penalized at age 59 and a half if you take money before that, well, it could make some sense to leave some money in 401k status so that you can have access early without that 10% penalty. Those are typically the two most common reasons that we would leave money in the 401k and not roll it to an IRA. So it does come up every now and then, but not that often.

Radon Stancil: All right. Our next section is going to deal with what we just talked about, but we're going to expand on it a little bit, which is rolling over to an IRA but we're going to really talk about maybe a different aspect of an IRA and that is would I ever want to move to a Roth IRA? And so Murs is going to walk us through how that would look and what that would look like as far as making that move from the 401k to a Roth.

Murs Tariq: Yeah. So the big topic here, and it's always in the front of a lot of people's minds, is taxation. So typically hand in hand with that conversation is Roth conversions, which is making the decision to pay tax on my account proactively so I can get it into a tax-free status, which is the Roth account. And then it gets to sit and grow tax-free and withdraws are tax-free as well. So a lot of benefits on the back end of it, but the front end of it is we have to make that decision and we got to pay some tax. And so with a 401k, Roth conversions are possible. Especially if you're above the age 59 and a half, you're in that category of inservice withdrawals. Or maybe you have an old employer plan. Then you can move that to an IRA that's a qualified rollover as well, and you can move it directly to a Roth IRA.

Here's what you have to consider and always consider is that there are tax implications on any type of Roth conversion. So you definitely want to be talking to your financial professional that's helping you out with this, or maybe a tax person that's helping you think through the tax implications of it and how you're going to pay that tax. But long story short is that Roth 401k conversions are possible to an IRA. That's the most common way to do it, but there's a lot of thought that goes into it. We have a whole team and whole process around Roth conversions and does it make sense for our clients? And the analysis that goes behind that is a little bit more than just what bracket am I in and do I fill up that bracket? So you want to be thinking about it. It's a hot topic and people are often drawn to the idea of tax-free and tax-free sounds really nice, but you got to think it all the way through.

Radon Stancil: All right. Our final section is reviewing beneficiary designations. I'll be very honest with you, this has nothing to do about being 50. It's just that it could be a good landmark for you to say, "Hey, when I'm years old, why don't I just go back and review any of my 401Ks for their beneficiary designation?" So here's why this is important. If I have my beneficiary wrong, meaning I've got somebody in the past maybe that was in my life and I put them as a beneficiary and they're not in my life anymore and I pass away, it's pretty much a done deal. It's going to that person. So sometimes we just forget. We forget who we put out there. I mean, we've got folks that have got old 401Ks that it's a previous company.

Our best story on that is we were talking to a lady for a while and she said, "Man, I really thought I saved more than that." And we were looking at all of her accounts and she had forgotten about a very sizable 401k that she had out there. So if I can forget that I actually have a 401k, it's probably possible that I could forget who my beneficiaries were in the 401k. And that is just such an important part of the estate planning is to make sure those designations are put in place.

So positive here. Turning 50 allows you to have some more opportunity. So if you're listening to this and you're thinking, I'm 50, I'm 59 and a half, I'm 55, any of those ages and you think I'd like to figure out how I can employ these strategies a little bit more, we would love to be able to hop on a phone call with you. We offer a 15-minute call right from the website. Go to the website pomwealth.net, click on schedule call. We would love to be able to just answer any questions you have. If we can't help you ourselves, we'll direct you somewhere that can help you. Our goal is just to help people make sure that they have peace of mind throughout retirement. We hope this has been beneficial. We will talk to you again next Monday.