Ready For Retirement Podcast Summary

Episode: What Should You Do With Your 401k When You Retire?
Host: James Conole, CFP®
Release Date: July 15, 2025

James Conole, CFP®, delves deep into the critical decision of managing your 401k upon retirement in this insightful episode of Ready For Retirement. Recognizing that a 401k often stands as the largest retirement asset for many, Conole emphasizes the profound financial implications that can arise from making uninformed choices. The episode meticulously explores various factors and strategies to help listeners make informed decisions tailored to their unique situations.

1. The Importance of the 401k Decision

Conole begins by highlighting the gravity of choosing the right path for your 401k during retirement. He warns, “Think you already know what to do with your 401k when you retire, you might want to think again because the wrong decision with this could potentially cost you many thousands of dollars over the course of your lifetime” (00:00). This sets the stage for an in-depth exploration of the topic.

2. When Not to Rollover Your 401k

One of the primary decisions retirees face is whether to keep their money in the existing 401k or roll it over to an Individual Retirement Account (IRA). Conole outlines scenarios where retaining the 401k might be more beneficial:

• Access Before Age 59½: If you're over 55 and plan to retire from the company holding your 401k, you can withdraw funds without the 10% early withdrawal penalty, a privilege not extended to IRAs until age 59½ (02:30).
• Backdoor Roth Contributions: For those utilizing backdoor Roth contributions, maintaining funds within a 401k can circumvent the IRS aggregation rule, thereby optimizing tax implications (09:15).

3. Key Factors to Consider

Conole outlines six pivotal factors that should influence the decision to keep a 401k or roll it over to an IRA:

a. Cost

• 401k Fees: Historically, 401ks have been associated with higher and sometimes hidden fees, though larger companies often offer more competitive rates (13:45).
• IRA Costs: Generally, IRAs, especially self-directed ones, can offer lower costs and greater transparency. However, it's essential to compare the "all-in cost" of both options to determine the most economical choice.

b. Control and Flexibility

• IRA Advantages: IRAs typically provide greater ease in executing trades, making monthly transfers, and implementing conversion strategies. Conole notes, “In an IRA it's going to be a lot easier to trade... it's going to be a lot easier to implement conversions” (17:20).
• 401k Limitations: While 401ks are effective for certain scenarios, they often lack the flexibility that IRAs offer.

c. Investment Options

• 401k Constraints: These accounts usually offer a limited set of investment options, which can be both a strength and a weakness depending on the quality of those options (21:10).
• IRA Potential: IRAs generally provide a broader array of investment choices, allowing for a more tailored portfolio.

d. Organization and Consolidation

• Streamlining Accounts: Managing multiple 401ks from previous employers can be cumbersome. Conole recommends either consolidating these into the current company's 401k or rolling them over into an IRA to maintain organization (24:35).

e. Ease of Use

• User Experience: IRAs often offer a more streamlined and user-friendly experience compared to 401ks, which may involve dealing with multiple third-party administrators (27:50).

f. Coordination Between Different Accounts

• Strategic Asset Allocation: Having all retirement funds in a single place, such as an IRA, can simplify the coordination of asset allocation across various account types, enhancing overall financial strategy (30:10).

4. Specific Planning Points

Conole delves into nuanced strategies that can significantly impact the management and taxation of retirement funds:

a. Tax Treatment of 401k Contributions

Understanding the different types of contributions within a 401k is crucial. Conole explains:

• Pre-Tax Contributions: These roll over to a traditional IRA without immediate tax implications.
• Roth Contributions: Contributions and their growth roll over to a Roth IRA, offering tax-free growth.
• After-Tax Contributions: While contributions themselves can move to a Roth IRA, any growth remains taxable unless converted promptly (34:05).

He emphasizes the importance of timely conversions to avoid substantial tax liabilities on growth, stating, “any growth on those after tax contributions, that's all considered pre tax” (36:20).

b. Net Unrealized Appreciation (NUA)

For those holding company stock within their 401k, NUA can offer preferential tax treatment on gains:

• Example: Converting $50,000 in company stock that has grown to $500,000 could allow the initial $50,000 to be taxed at ordinary income rates while the $450,000 gains benefit from capital gains treatment (40:15).

This strategy requires careful planning and consultation with financial advisors to maximize tax benefits.

c. Early Distribution Penalties

Conole reiterates the differences in early withdrawal penalties between 401ks and IRAs:

• 401k: Withdrawals after age 55 without penalties if still employed by the sponsoring company.
• IRA: A standard 10% penalty applies for withdrawals before age 59½, with limited exceptions (43:10).

5. Making the Decision: 401k vs. IRA

Conole concludes by summarizing scenarios where one might prefer a 401k over an IRA and vice versa:

• Choose a 401k If:

  • Your plan has low fees and excellent investment options.
  • You require access to funds before age 59½.
  • You do not need extensive flexibility in managing investments (45:00).

• Choose an IRA If:

  • Your 401k has high fees or limited investment choices.
  • You desire greater control and flexibility over your investments.
  • Consolidation and ease of management are priorities (46:30).

Understanding personal financial goals and circumstances is paramount in making the optimal choice.

6. Final Thoughts and Recommendations

James Conole emphasizes the importance of personalized financial planning:

• Consult Professionals: “Explore this in more detail. Talk to your CPA, talk to your financial advisor before actually doing this” (09:45).
• Strategic Planning: Utilize strategies like NUA and timely conversions to optimize tax outcomes and preserve retirement assets.

Conole wraps up by encouraging listeners to thoughtfully consider their options, stay organized, and seek professional guidance to ensure their retirement funds work efficiently towards their peace of mind and financial security.

Notable Quotes:

• “Think you already know what to do with your 401k when you retire, you might want to think again because the wrong decision with this could potentially cost you many thousands of dollars over the course of your lifetime.” (00:00)
• “In an IRA it's going to be a lot easier to trade... it's going to be a lot easier to implement conversions.” (17:20)
• “Any growth on those after tax contributions, that's all considered pre tax.” (36:20)
• “Explore this in more detail. Talk to your CPA, talk to your financial advisor before actually doing this.” (09:45)

This episode serves as a comprehensive guide for retirees grappling with the decision of managing their 401k assets. By addressing both foundational considerations and intricate strategies, James Conole equips listeners with the knowledge to make informed, strategic decisions that align with their retirement goals.