Last episode we talked about the different items to take into account if you are thinking about doing a rollover. John and Nick will discuss how to actually process a rollover and some common mistakes to avoid.
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Transcript of Today's Show:
Marc: Thanks for tuning in to Retirement Planning Redefined with John and Nick from PFG Private Wealth. We appreciate you tuning back into the podcast. We're following up with our prior session on rollovers, if it's right for you, having the conversation and this session is going to be a little bit more about how to kind of go through that. Some of the differences, some of the biggest mistakes sometimes that people might get themselves into when attempting to do this. So we're going to dive in and get started. We're just going to just hop right in.
Marc: Nick, differences between rollovers and transfers. Let's just start there, kind of break it down a little bit for us.
Nick: Yeah, I would say, the reality is, is that this space from the standpoint or the perspective of the process of taking your money from one place in a retirement account and putting it into another place in a retirement account, the jargon or the terminology gets intermingled quite a bit. And some of those terms that get intermingled are rollovers and transfers, and we'll talk about it a little bit more, but from the perspective of a direct rollover versus the 60 day rollover.
Nick: Just to kind of back up a quick second, when we are discussing or having this conversation we kind of preface it from the standpoint of the money that we're talking about is money that is held in a retirement plan of either a former employer, so maybe it's 401(k) or 403(b), and you are looking to move that money elsewhere.
Nick: Your options are typically you can take that money and you can do a direct rollover into either traditional individually held of IRA. Or if the funds are Roth funds, you can move it into a individually held Roth IRA. Or if you are employed with a new employer and you are eligible, you have to check with them, you may be able to move the money into the new plan at work and do it that way.
Nick: When you are doing that, usually when you are executing kind of this process, it either has to be done via a form, or via a phone call. Some places require a form and we've seen a lot of people make mistakes on completing the form correctly, so oftentimes we'll help clients with it. And then if it's a phone call, the issue is that you're dealing with somebody and I will say the level of service probably over the last few years at companies has gotten better, but we still see a lot of mistakes.
Nick: Oftentimes you are working with somebody that's working in a call center and although it is their job, mistakes happen. When you are kind of doing this process, understanding that the terminology of executing a rollover is when you are moving that money from that retirement account into an IRA or a new plan. A transfer is when you have an existing account that is an IRA or a Roth IRA, and you are moving it from one custodian to another custodian.
Nick: I'll use an example just to try to make it a little bit more easily understandable. A direct rollover example is, okay, Mrs. Client, she just got done working at her company and their 401(k) was held at Fidelity. And now Mrs. Client would like to move the money from Fidelity into the IRA that she opened up at Vanguard. She's able to call up and get the process going of processing that roll over from Fidelity, the 401(k) to the IRA at Vanguard. A transfer is you already have an IRA or somebody already has an IRA. We can say at T. Rowe Price and they have a new IRA, they no longer like T. Rowe Price, they have a new IRA at Fidelity, and they want to move that money from T. Rowe Price to Fidelity. That is a custodian to custodian transfer. And the reason that we mentioned that is because there are some limitations on what are technically rollovers.
Nick: John, can you give a little bit of an example of exactly what a 60 day roll over it?
John: Yeah. There actually kind of two ways to do it where if it's coming from a plan. Let's say if it's coming to you directly. So John Teixeira gets a check from the plan, I have 60 days to put that into my IRA. Or if let's say I have money in my IRA, and for whatever reason, I might need the funds and I pull it out, I have 60 days to put it back into the plan, and that would be a kind of a 60 day rollover period.
John: Important if you are processing it that way, definitely keep good records. You want to keep the records of when the money was distributed when you received it, and then when you deposit it, because if you ever were audited, you have to prove that the money went back in within 60 days or else everything is taxable.
Nick: And the issue with that 60 day rollover and what kind of give an example of kind of one of the most common ways that we'll see it as a mistake is that you are only eligible to execute I believe it's one of those per calendar year. Is that correct, John?
John: Yeah, that is correct.
Nick: So if somebody is making a mistake or even doing it on purpose, if they by mistake execute more than one of those in a year, there's some pretty significant penalties that are involved in that, and that's really something that you want to avoid. What we always like to see is the money moving directly from one custodian to the other custodian. And when that happens, the check is made payable from the old custodian to the new custodian. And we'll kind of talk about that in a little bit more detail, but I wanted to give a kind of a quick example of where we see this mistake happen the most often.
Nick: The reality is that the majority of the people that are listening to this with how things are set up currently, they may not run into this too often, but where we have seen this issue come up quite a bit is if they are helping their parents with finances. Maybe their parents are in their 70s or 80s. And oftentimes that age demographic loves CDs and they love chasing rates at banks. And there will be confusion from the standpoint of, hey mom has a CD at BB&T Bank, and the CD is actually inside of an IRA. And she goes into the branch to move the CD from BB&T bank over to Bank of America because Bank of America is offering an extra 0.2%. And so she's working with the teller at the bank and she says, "Hey, I want to take out my money because I'm moving it to another bank."
Nick: What we've seen happen is that teller will sometimes have that check made payable to the client, to mom, in her name. And at that point it's considered that starts at 60 day window. The reality is that we want that check made payable to the new institution for the benefit of mom. This is where we've seen issues kind of pop up and arise where mom might try to do this a couple of times a year. Now she has done more than one 60 day rollover in a year because it was done incorrectly. It wasn't necessarily her fault and it just creates this total kind of quagmire and tax nightmare.
Nick: We always like to kind of bring that up to make sure that people understand that that's an issue. And again, because the terminology is oftentimes intermingled and not done correctly, having that done the proper way is really important. I know John does a good job of explaining the best way that people can make sure that they execute that properly.
John: Thank you, Nick. I do a very good job at explaining that, actually. So I appreciate that. So yeah, just kind of walk you through the process of doing a direct rollover. First step is contacting the investment provider for the retirement plan and you need to determine, can they do this over the phone or is it a form as Nick mentioned earlier? Let's just assume it's over the phone and you're putting your money into, let's say TD Ameritrade. TD Ameritrade is the custodian, they're the ones holding the funds. They're like a Fidelity or Vanguard. So you want to make sure that check is made payable to the custodian, and that way you're not the one getting the receipt of the funds, it's the custodian, and that's the main reason why it doesn't kind of execute that 60 day rollover kind of window.
John: It's a direct transfer to the custodian and the checks going to be written out to in this example, TD Ameritrade for benefit of you. So if I'm doing it, it's going to be check's going to be made out to the TD Ameritrade for Benefit of John Teixeria. Now, once you receive that check, we were going to say it now, do not sign the check, because it's actually not written out to you, it's written out to the custodian. We do have some people that will say, "Do I sign it?" Or, "I signed it. What do I do?" Don't sign it. There's no need to.
John: Once you receive the check, the next step is now it needs to get deposited into your IRA. And if you're working with an advisor, typically you pass it off to him or her. And if you're just working directly with an investment company, you're going to want to go ahead and get it to the investment company and have them deposit into the IRA for you. If you are mailing checks, just some people like to be cautious and kind of make sure it has some type of a tracking number which is something you can request from the retirement provider, not necessarily, but some people just prefer that so they can kind of keep track of where it's at.
Marc: Okay. So obviously there's a lot that can go into this and there's mistakes that are going to happen as you just alluded to. So what are some things to maybe avoid, just kind of some simple things to check off for folks?
Nick: I would say the first one and we talk about this whole process in the class that we teach. And I have a slide that I bring up and it's a huge picture of a train fire. The biggest mistake to avoid again, is to do a lump sum distribution when the money's paid directly to you. That is the number one. And I know we've kind of harped on it quite a bit, but it can be confusing because especially on some of the forms that companies use. They say, "Hey, I want to take all my money out, because I'm going to move it to this new place. So that's a lump sum distribution, right?"
Nick: Well, depending upon where it is, that might mean that that money is coming directly to you, which it enters you into that 60 day window, which is what we want to avoid. Making sure that you do a direct rollover versus a lump sum distribution is really important. That's probably the number one mistake.
John: Yeah, and if we see the lump sum, what the 401(k) or whatever, 403(b) provider will have to automatically do. If I were to receive the money directly to me, they would have to withhold 20% automatically. 20% is going to uncle Sam, so that could create an issue if you're trying to get all your money back into another IRA within 60 days.
Marc: Well you mentioned 401(k), and then you said another. I would assume that this is kind of the same for several of those alphabet soups, right? Whether it's a 403(b) or TSP, is that same kind of process in general?
John: Yes. Yeah.
John: I mean, yeah, exactly. Employer retirement plans, it's-
Marc: Gotcha, okay. Because sometimes people-
John: ... across the board.
Marc: ... get confused by that, right. They'll think, "Oh, well I don't have a 401(k). I have a 403(b) or whatever."
John: Yeah, 401(k), 403(b), 457-
John: [crosstalk 00:11:41] plans.
Marc: Right. Yeah.
John: All of them.
Marc: All of them. Yeah, the whole alphabet soup. Exactly.
Marc: Nick, any other mistakes to avoid anything too that we might've missed as we're kind of winding down here?
Nick: I know it's come up a couple of times, but sometimes people will worry about timing. From the perspective of there's... As an example, the last five months really kind of post-Corona market drops, et cetera, et cetera. And people will say, "Hey I've lost a bunch of money in my account, is now the time to move it? Should I wait for it to bounce back?" And the reality is that you want to take a broader perspective and look at it from the standpoint of that you're moving it from market to market. So the goal is to do it as quickly as possible, but the perspective of, hey, should I let this bounce back before I move it? Isn't necessarily always valid because as long as you're in a similar allocation and maybe even a better allocation with a higher level of management, the reality is, is your bounce back could be quicker and/or better potentially by making a change the sooner the better. It all depends, but that's usually a pretty low priority variable in the whole conversation is time.
Marc: Okay. All right. Well, there you go, folks. So as always, there could be some moving parts here, it's not always very too complicated, I suppose, maybe is a good word, but it can be, especially if you're not focusing. The best way to do it is to avoid some of those mistakes by reaching out and talking with a qualified professional before you take any action, getting some helpful tips, getting some advice, whatever the case might be. But before you take action, reach out to someone who does this on the regular. So call John, call Nick, give them a jingle at (813) 286-7776, that's (813) 286-7776. When you're talking about doing a rollover and if it's right for you, there's just a lot of questions that they can help you walk through and get you some advice going in the right direction. Also, stop by the website at pfgprivatewealth.com, that is pfgprivatewealth.com.
Marc: While you're there, subscribe to the podcast, Retirement Planning Redefined, you can find them on Apple, Google, Spotify, whatever platform you choose. So there you go, that's going to do it for the series here on rollovers guys. Thanks for your time as always. I appreciate it. Obviously, there's so much that goes on in the financial world. It's good to just do these since you're not doing classes right now, doing a lot of things online or podcasts. It's good to go through and kind of get this information out for folks.
Nick: Thanks, Marc.
John: Thank you.
Marc: Appreciate your time. We'll talk to you next time here on Retirement Planning Redefined with John and Nick of PFG Private Wealth, and we'll see you next time.