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What Should I Do With My Old 403(b)? 5 Options to Consider

What Should I Do With My Old 403(b)? 5 Options to Consider

You may have recently changed jobs and are wondering, “What should I do with my retirement account that was established through my former employer’s retirement plan?”

If you work for a university, public school, or a 501(c)(3) tax-exempt organization (more commonly referred to as a charitable organization or nonprofit), you may have participated in a 403(b) plan. A 403(b) is similar to a 401(k) in many ways. It is a defined-contribution plan that offers an opportunity for an employee to save and invest for retirement in a tax-deferred manner. Some 403(b) plans offer a Roth feature, as well. Roth contributions are taxed in the year of the contribution with the promise of tax-free withdrawals (assuming the withdrawal is considered a qualified distribution).

Five Options For the 403(b) From Your Previous Employer

So let’s get to the reason why you’re probably here – options for the 403(b) from your previous employer. You have several options on what can be done with your old 403(b):

  1. Do nothing
  2. “Roll” the 403(b) into an IRA
  3. “Roll” the 403(b) into your new employer’s retirement plan
  4. Cash it out
  5. A hybrid of these options

1. Do nothing

You can keep the account where it’s at. It will continue to stay invested in the mutual funds or the annuity contract within the 403(b) plan. You won’t be actively contributing to the account anymore, but the account value will still fluctuate (and hopefully grow over the long haul). Balances in the tax-deferred bucket will continue to be tax-deferred and balances in the Roth bucket will continue to be treated as Roth funds. In some cases when the account balances are very low, the plan may force the former employee to take the funds out of the 403(b) plan. If that is the case, there usually is a way to roll the funds into an IRA (see bullet point 2 below) at the same custodian where the 403(b) is held.

2. “Roll” the 403(b) into an IRA

Tax-deferred balances can be rolled into a Traditional/Rollover IRA. If done correctly, there is no taxable event when rolling the funds from the 403(b) to the IRA. Be aware of an “indirect rollover” which is required to withhold 20% upon sending the 403(b) funds out of the account (also known as a 60-day rollover). This is where unwelcome tax surprises can occur. Similarly, Roth balances can be rolled into a Roth IRA. Again, if done correctly there is no taxable event when rolling the Roth funds from your old 403(b) to the Roth IRA.

3. “Roll” the 403(b) into your new employer’s retirement plan

The IRS allows you to roll your old 403(b) into your new employer’s plan, whether it be another 403(b) or another qualified plan like a 401(k). However, just because the IRS allows it doesn’t mean that your new employer’s plan allows it. In other words, when your new employer creates a retirement plan, they are not required to have the plan allow incoming rollover contributions. That said, many plans allow rollover contributions. Both tax-deferred and Roth funds can be rolled into your new employer’s plan and will continue their respective tax treatment (i.e. tax-deferred stays tax-deferred, Roth stays Roth).

4. Cash it out

Generally, this isn’t recommended! However, it is an option. Unless there is a severe need for cash we do not recommend this when it comes to your long-term retirement goals. Generally speaking, the funds distributed will be taxed and penalized. There are additional variables that come into play here (hardship withdrawals, age of the employee, tax-deferred vs. Roth funds, basis vs. earnings, etc.) but that is beyond the scope of this blog post.

5. A hybrid of these options

You can rollover some funds and also perform a Roth Conversion of some of the funds, if you’d like (a Roth Conversion will be a taxable event). A Roth Conversion can be part of a complex planning strategy; make sure you talk to your professional advisors when considering this approach. You could also rollover some of the funds and take some of the funds in cash (taking the cash will be a taxable event). Again, taking a cash distribution before retiring generally isn’t recommended.

Where to from here?

Some of the scenarios above are pretty straightforward; others are not! Things to consider before making any changes include investment options available, fees, plan design (in the case of a qualified retirement plan), and consolidation needs. Chat with your financial advisor and your tax professional to determine what makes the most sense for your retirement plan and your individual situation. Please reach out if we can be valuable to you when it comes to your financial planning needs.

Mitch DeWitt, Certified Financial Planner™, MBA

What Assets Get a Step-Up in Basis at Death?

What Assets Get a Step-Up in Basis at Death?

With the death of a loved one, one question we often get is, “What assets are entitled to a step-up in basis and what assets aren’t entitled to a step-up in basis at death?” To define what we mean by step-up in basis, sometimes referred to as stepped-up basis, here is an example:

Your mother purchased 100 shares of XYZ company at $10 per share in 1950, costing her $1,000, which is her “basis.” She holds the shares without selling until she passes away in 2022. The share price is $1,000 per share at her date of death. 

Despite the fact that she has a significant gain of $99,000 in this example, the basis “steps up” on the date of death to the share price on that date – or $100,000. If the beneficiary of this stock decides to sell it a few months later, their basis is $100,000 and the gain or loss is simply the value of the shares sold minus the basis. For example, if they were sold at a value of $110,000, they would owe tax on $10,000 of capital gains (and in this case, short-term capital gains).

Examples of Assets That Step-Up in Basis

  • Individual stocks, bonds, mutual funds, and exchange-traded funds (ETFs) held in taxable accounts.
  • Real estate – this includes many forms, such as multi-family residences, primary residences, vacation homes, and office buildings. 
  • Businesses and the equipment in the business.
  • Art, collectibles, home furnishings – such as antiques that may have increased in value.
  • Cryptocurrencies.
  • Non-fungible tokens, or NFTs.

Examples of Assets That Do NOT Step-Up in Basis

  • Individual retirement accounts, including IRAs and Roth IRAs.
  • 401(k), 403(b), 457 employer-sponsored retirement plans and pensions.
  • Real estate that was gifted prior to inheritance.
  • Tax-deferred annuities.

We encourage our clients to seek out the counsel of a qualified estate planning attorney to plan out their wishes and assure that they are making good choices regarding future taxation of their assets and avoiding unintended consequences of their actions.

– Clint Walkner

Note: We are not CPAs. Please consult a tax professional if you have any tax questions specific to your own personal situation.

What are the Limits for My Investing and Spending Accounts?

What are the Limits for My Investing and Spending Accounts?

As Spring springs and we approach the end of the first quarter of 2022, it is a good time to familiarize yourself with the changes to the more popular savings vehicles. It is imperative to understand the basics of these accounts to avoid mistakes, as the penalties can be quite onerous. This is not an exhaustive list, but it is a good place to start. 

The list is broken up into the appropriate categories of employer-sponsored plans, personal retirement plans, healthcare and spending accounts, and educational accounts.   

Employer-Sponsored Plans

401(k), 403(b), and most 457 plans have a new maximum employee contribution limit of $20,500, up from $19,500 in 2021. The overall maximum annual additions into defined contribution plans (which include 401(k) and 403(b) plans) increased from $58,000 to $61,000. 

Individuals aged 50 and older are allowed an additional $6,500 of contributions. Note that the “age 50 catch-up” amount did not increase from 2021 to 2022.

Personal Retirement Plans

IRA and Roth IRA contribution limits are unchanged at $6,000 for people under the age of 50 and $7,000 for individuals 50 years old and older. 

The traditional and Roth IRA income phase-out ranges are also increasing. 

Healthcare and Spending Accounts

Health Savings Account contribution limits increased from $3,600 to $3,650 for individuals and $7,200 to $7,300 for families. 

The HSA catch-up contribution for individuals 55 years old and older is an additional $1,000. This is unchanged from 2021.

The  Health Care Flexible Spending Account (FSA) limit has increased to $2,850 in 2022 – up from $2,750 in 2021.

The Dependent Care FSA limit in 2022 has reverted back to $5,000 for a married couple filing a joint tax return. The American Rescue Plan temporarily increased the limit to $10,500 in 2021.

529 College Savings Plan

529 plans do not have contribution maximums; however, contributions are considered completed gifts for federal tax purposes, and in 2022 up to $16,000 per donor ($15,000 in 2021), per beneficiary qualifies for the annual gift tax exclusion.

The Coverdell IRA contribution limit is $2,000 per student, per calendar year. 

The annual changes to contributions and income limits are not consistent year-over-year; therefore, understanding the changes and how they affect your specific situation is important. It is a good idea to check your contribution levels early in the year as payroll adjustments and/or automatic contributions into your IRA accounts may be required periodically. 

Nate Condon 

Financial Check List for the End of the Year

Financial Check List for the End of the Year

There is a small, but distinct, satisfaction that comes from crossing items off of a list. The immediate sense of accomplishment gives us a boost that propels us to the next thing on the list. Whether it is a chore list on the weekend or items off a grocery list, we, as a whole, increase our productivity when we have a set of priorities. 

Our financial lives would benefit from a task list just the same. As we move through 2021 with Covid still in the news and the stock market enjoying another great year, we should keep in mind that there are still things to accomplish pertaining to our finances. Think of this as a mid-year financial checklist: 

1: Fund your IRA, HSA accounts

If you have personal retirement accounts, such as Roth or Traditional IRAs, be aware of how much you have contributed to this point and how much you plan to fund before April 15, 2022. The maximum contribution amount for Roth or Traditional IRAs for 2021 is $6,000, or $7,000 if you are over the age of 50. Monthly systematic contributions plans are a great way to fund these accounts; however, many of these plans were set up years ago when the contribution limits were lower. You may not be max funding your account if you haven’t increased your monthly amount within the last few years. Health Savings Accounts are another great way to save money in a tax-preferred way. Not everyone is eligible for an HSA, so check to make sure you qualify. The 2021 contribution limit for individual HSA accounts is $3,600 and $7,200 for family accounts. 

2: Complete your RMDs from IRA, Beneficiary RMD

Required minimum distributions, or RMDs, are annual distributions from IRA accounts. In 2020, required minimum distributions were suspended and have been reinstated for 2021. Recent legislation has increased the age for RMDs to 72 for tax-deferred IRA; however, inherited IRA accounts have different distribution restrictions, so be aware if you are the owner of an inherited IRA as you may need to take distributions prior to age 72. RMD’s must be taken by December 31 of each year, except in the year that you turn 72, in which you have until April 1 of the following year. It is the responsibility of the IRA owner to ensure that the total RMD amount due is withdrawn each year and that the calculation takes into consideration all of their tax-deferred IRA assets.  

3: Verify your 401k, 403b Contributions

The maximum amount that employees can contribute to their 401k or 403b accounts for 2021 is $19,500, with an additional $6,500 allowed if the employee is over the age of 50. This maximum contribution amount has been increasing over the last few years so it is important to verify the amount coming out of each paycheck if your desire is to max fund your account. These limits do not take into consideration any match provided by your employer. Most employers offer flexibility in making and changing contribution amounts, so you could increase your amount mid-year if you are not on track. Also, be aware that many of the 401k or 403b plans now offer a Roth option within their plan. This doesn’t affect any Roth IRA contributions. 

4: Check Your Mortgage Rate For Possible Refinance Opportunities

I fully realize that the mortgage refinance discussion is becoming quite repetitive at this point, but it does bear repeating. The current mortgage rates are under 3% for a 30-year fixed mortgage, and the 15-year mortgage rate is in the low 2% range at many lending institutions. We generally advise looking into a mortgage refinance if you are planning on staying in the home for at least 3-5 more years and a rate reduction of at least .5%-.75%. That said, everyone has a different financial situation and should consult with a financial advisor or mortgage specialist prior to making a final decision. For many people who have refinanced within the last few years, another refinance may not be appealing; however, it would behoove you to look into this option again if the variables are in your favor. 

5: Review Your Cash Position, Travel Expenditures

Take time to review your current cash position and the amount of cash you prefer to have at any given time. A person or family’s cash position is an interesting subject within the world of financial advising. We have clients who need six-figure cash positions to feel comfortable, while other clients desire to hold small cash positions as they don’t like “money on the sidelines.” We like to frame this conversation by taking into consideration any other investment and retirement accounts. For example, a client with a large taxable account can afford to get away with a smaller cash position in contrast to a client with all of their non-cash assets in IRA or 401k accounts, where liquidity provisions are more onerous. We strongly believe that every well-built financial plan has a healthy cash position to cover job losses, emergency expenses or unexpected travel. The current low-rate environment is creating a challenge to find a decent return for cash; however, safety is the main job for this portion of your financial plan. 

This is not a comprehensive list, by any means, but I hope this makes you think about a few things to review between now and the end of the year. We are more than happy to discuss any of these items with you and how they pertain to your overall financial plan.

Nate Condon

What are my 401k options if I get laid off?

What are my 401k options if I get laid off?

By Mitch DeWitt

Dan Corcoran – the newest member of the Walkner Condon team and social media/marketing extraordinaire – and I were having a casual conversation over coffee one morning, and we naturally turned to the topic of sports. Dan has a background in social media and marketing in the semi-professional hockey space, and I have been a lifelong sports fan, primarily rooting for my Michigan Wolverines and the Detroit professional sports teams (it has been a rough time to be a sports fan in Detroit lately). Dan mentioned the recent ESPN layoffs, which I was previously unaware of. It’s safe to say that most sports fans probably grew up watching SportsCenter and have tuned into ESPN to catch our teams’ games at some point. Being the financial advisor that I am, I thought of the financial planning opportunities and the considerations of rolling over a former employer’s retirement plan. Being the marketing guy that Dan is, he told me to write a blog. (By the way, if you’re one of the many folks who have lost a job over the last few months, here’s another helpful blog about working through a job loss). 

So, before we go any further, what is a rollover? The IRS defines a rollover as the following:  “A rollover occurs when you withdraw cash or other assets from one eligible retirement plan and contribute all or part of it, within 60 days, to another eligible retirement plan.” Sounds pretty straightforward. But there are many rules about what types of accounts can be rolled over and what types of accounts are acceptable destinations. Furthermore, there are some tax traps that people can fall into. If done correctly, a rollover of tax-deferred assets should not be a taxable event. Unfortunately, I’ve seen “do-it-yourselfers” attempt to roll over their assets from a former employer’s retirement plan and have realized a large and unexpected taxable event. This is where we come in: to help people advise on their options with their retirement plans, make a decision on their best course to align with their retirement goals, and then confidently execute the plan. 

If I got laid off, what are my options with my retirement plan / 401(k)?

Roll it over to another qualified plan or IRA

The IRS publishes a rollover chart to show what they would deem an acceptable rollover. In many cases, we find ourselves interpreting this chart and educating our clients on where they can roll their retirement assets as well as what makes the most sense for their situation. Again, if done correctly, a rollover should not be a taxable event (unless you want it to be in the case of a conversion. More on this in my next point). Many people come to me saying that they want to “consolidate” their accounts or “transfer” their accounts. This presents another education opportunity with clients, since a transfer is treated differently than a rollover. A transfer typically refers to the same type of account moving from one institution to another (e.g. Roth IRA at Fidelity to a Roth IRA at TD Ameritrade), whereas a rollover refers to moving assets from one type of account to another (e.g. 401(k) at Fidelity to a Rollover IRA at TD Ameritrade). Furthermore, there are direct rollovers and indirect rollovers. Direct rollovers are where your assets are sent from one custodian to another (e.g. Fidelity to TD Ameritrade). No taxes are required to be withheld when a direct rollover is performed. An indirect rollover is where you do take possession of your assets during the rollover process. In this case, you are required to withhold taxes from the distribution amount. To avoid paying taxes on an indirect rollover (and ensuring that the amount withheld isn’t included as taxable income), you must deposit your assets into another qualified plan or IRA within a 60-day period. You also must ensure that the amount distributed from the original account (including the withheld amount) is fully deposited into the new account. Generally speaking, direct rollovers are preferred to indirect rollovers because withholding is not required. You will receive a 1099-R for the tax year that you conduct a rollover. Rollovers are reportable to the IRS even though they are not taxable. A 1099-R is issued whether the rollover is direct or indirect. However, in the case of an indirect rollover, it is up to the taxpayer to prove that they properly rolled over their assets to avoid a taxable event (when they file their tax return).

Convert it to Roth

You may be able to convert all or a portion of your tax-deferred assets in your retirement account. Converting your tax-deferred assets to Roth will be a taxable event. Some might wonder why you would want to do that. Let’s say someone might be in a lower tax bracket in the current tax year vs. a higher tax bracket when they take money out of the account in the future. The thought is that if it is going to be taxed at some point, why not tax it at a lower rate? We help many clients analyze their different “buckets” that their assets are in: taxable, tax-deferred, and after-tax (there are technical differences between “after-tax” and Roth, but that is beyond the scope of this blog). Depending on the situation there might be a reason for a client to spread out their assets between the three buckets or it might make sense to heavily favor the Roth bucket, for example. If the client’s circumstances align to make a Roth conversion, it may occur all at once or over a phased approach over several tax years. This is something that should be coordinated between a financial advisor like us and a tax advisor.

Keep it where it’s at

Many plans will allow you to keep the assets in your 401(k) (or similar retirement plan). Although they are able to force you to move the balance out of the plan, usually if there is a less than a $5,000 balance in your account. You might want to do this if you like the investment options, the fee structure, or simply the convenience of not having to take any action.

Cash it out

Yes, this is an option, but in most cases it’s not recommended because of a potentially large tax bill. Additionally, it may be detrimental to your financial plan and ability to obtain retirement goals. Usually, the only time this makes sense is when someone finds themselves in an unexpected and dire financial situation. 

It is worth having a conversation with us if you find yourself in a situation where you have been laid off or even if you have several outstanding 401(k) accounts spattered across different retirement plans and financial institutions. We would love the opportunity to educate, offer some guidance, and eventually help execute your plan. You can reach out directly to us here, so we can get the conversation rolling (pun intended, I couldn’t help it).