Can you actually transfer money from your IRA back into your 401(k)? You can, but it has to be done exactly right.
Scott: In this segment of our program, we talk with a real advisor at Hanson McClain, who talks about a real-life experience they had working with an individual or a couple. What the issue was, what kind of advice they gave, and what the outcome was. You are to take this as an individual situation, and no two situations are alike.
Pat: Your experience may vary.
Scott: Yes, so we're going to talk with David Schauer. David Schauer joined Hanson McClain roughly 18 years ago, been with us for quite a long time. He rose to our Chief Financial Officer in 2004.
Pat: Chief Investment Officer.
Scott: I'm sorry, Chief Investment Officer. If you subscribe to our newsletter, on a quarterly basis we send out a market update that has a video with David Schauer, so you've seen David Schauer there.
Pat: So David is a Chartered Financial Analyst (CFA), a CERTIFIED FINANCIAL PLANNER™ professional, and he has a Master's degree in Financial Analysis from USF.
Scott: That's right. So, David, welcome to our program.
David: Good to be here.
Pat: Tell us a little bit about your client's situation, give us the background, David, then let us know what your recommendations and the outcome were.
David: Sure. This was not a client, but a person who had called in and had some questions. I think they were introduced to the firm by the radio show or some of the other ways in which people come to us. But basically, this person had come to us, I'd never met him, and so I had a phone appointment with him. He had separated from service from a company about four or five years ago. He had moved his 401k to an IRA, and subsequently gone to work for another company. He was now parting ways with that company.
This was in October, November, and he was not retiring, but leaving that company in January. He was about 54 at the time. January of that year, he was going to be 55. He was going to be looking to go back to work in about a year or so. They were moving to another state, a relatively low cost of living state. They had had some challenges in the past with respect to credit, whatnot. When buying a house, even though it was a lower cost state, they needed some additional means. When we looked at the dynamics of their portfolio, basically what they had was this IRA from his prior employer.
In looking at this and realizing that their income was going to drop, but they were comfortable with that because she already had a job back in the south. They just wanted to have a home paid for. What I suggested was they take the IRA, they move that back into the 401(k) of his existing employer. Now granted he was only going to be there another two or three months, he knew that. But what he didn't quite know was that because he was going to retire in January, retire in the way the IRS would look at it, he was just parting...
Pat: But he wasn't necessarily retiring, he was separating from service from that particular employer.
Pat: We use the word retire, it doesn't actually require retiring. I think I know where you're going with this and I think it's great advice. He was just separating from service from that employer at the age of 55.
David: Yes. They were going to have a dip in income for that year that he was going to separate. He was going to take some time back there, get the house kind of settled that they were hoping to buy, and then look to go back to work the following year. What I suggested is move his IRA back into his 401k, then separate from service. Now, even though he was 54, he was going to be 55 in that year in which he was separating. I think his birthday was October or November of the following year. He had just turned 54. But because he was separating in January he was going to be 55 in the calendar year in which he separated.
He was able to take a distribution without having any penalties applied along with the proceeds from their home here. They could buy a home outright, where really they couldn't get any financing because of some prior issues. This just fit perfectly, plus, if he did stumble in getting a job in the following year, they had access to the 401(k) money as a fallback. That wasn't the plan, but as a fallback, if something should come up, they’d have access to the money without any penalties. It really fit their situation perfectly. The timing fit well.
Pat: David, for the listeners, if you're age 55 or older in the year in which you separate from service...
Scott: Either retirement or moving on, just leaving.
Pat: There are no penalties to take money out of a 401(k). There's taxes due.
Scott: Of that employer's.
Pat: Of that employer's.
Scott: Retirement plan of any kind.
Pat: What David did, that had this IRA, he said, "Move it to your company 401k plan when you separate from service."
Scott: Because IRAs are locked to 59½.
Pat: You're going to take that lock off it early, put it in the company's 401k, and then you're going to take distributions. You're going to pay taxes on it, but you're not going to pay 10% Federal penalty. And certain states have, you know, the State of California has a two and a half percent penalty of their own. Which was a great idea, because you took illiquid assets and made them liquid for this particular client. Whether they needed it or not it was a good idea. David, do you think that...?
David: I know for a fact they went ahead and bought the house. It worked out well. They called me back afterwards and thanked me. It worked exceedingly well.
Pat: That was good advice, you were able to help them get to their goals. And they may not have...
Scott: That's what you call finding a...it's not really a loophole, but it's using the tax code to its maximum benefit.
David: Right. To their benefit.
Scott: Yeah, to their benefit.
Pat: Because they may have pulled the money from the IRA in order to buy the house, in which case they would have had to pay penalties on it.
Interviewer: That was good advice, David.
Scott: Thank you, David.
David: It worked out well.
Interviewer: All that formal education, that CFA, CFP, that Master's in Financial Analysis, it's finally paying off.
David: A little bit here and there. All right. Good to join you, guys.
Scott: Thanks, David.