Episode Transcript
[00:00:00] Speaker A: Any examples used are for illustrative purposes only and do not take into account your particular investment objectives, financial situation or needs and may not be suitable for all investors. It is not intended to predict the performance of any specific investment and is not a solicitation or recommendation of any investment strategy.
Welcome to Reyna Retirement. Reyna Reyes has dedicated her career to helping people make small, smarter financial decisions. Raina retirement is all about breaking down complex financial concepts into language you can actually understand.
Now here's the co founder of American Federal Benefits Consultants, Reyna Reyes.
[00:00:41] Speaker B: Well, happy day to you and all the buckets of money that you've been collecting over the years. And that's something people come to me very often with. Hey, Raina, I've got this account. Hey, Raina, I have this other account.
What do I do with it?
Where is it going to go? What's the best place for it? Hey, something's wrong with me. I want to be sure I leave it to my family. All these kinds of things. I've seen people with 20 buckets of money between the two of them. If they're married, I've seen people with 10 buckets of money. What do I mean by a bucket? Different accounts, different places you've stashed cash, different types of plans, all kinds of things. What are the things you can do with them? What do you think would be best? What do I think would be best? What do we agree together that'll be best? What? What are the different things you can consider? Well, depending on where it currently sits, many people you've heard of me talk about it. You've heard a bunch of other people talk about it. You heard of the idea of a roll over. That's not, hey, honey, you're snoring. Roll over. Or that's not the Hank Williams song when he says, move it on over, roll it on over. You know the one where he's like, move over, little dog. Cause the big dog's moving in. Okay, there's your song for today. That's all you get, unless I think of another one. But that's not what I'm talking about. We're talking about rolling from one bucket, one account, one place to another.
Why? Well, maybe there's a better widget, maybe there's a better mousetrap, maybe there's a better bucket you can use. So let's just talk about what does a rollover even actually mean? Well, you've got this idea of maybe that's you right there in the middle.
I've got all this Money. I've got a couple of buckets. I've got three buckets, 10 buckets, 23 buckets. It doesn't even matter one, what am I gonna do with it? Right? Oh, my goodness. That's the movie Sergeant York from way back in the day. Gary Cooper. He says, how am I gonna do it? Well, that's what you're wondering. What am I going to do with this cash? What's the best place? What, What's. What's the best plan? Well, I want you to understand the idea of the current bucket of money. I'm using TSP as an example here on your left, where the money currently sits. A tsp is the same thing as like a 401k or a 403b or a. Any bucket of money that's never been taxed. Remember, Uncle Sam waits outside the door of those buckets ready to tax you before you can get it. I've used the example before of coffee, where you put in the coffee, they put in the creamer, whether that's a match or the growth, like the interest you earn. And then before you can take a sip of coffee, Uncle Sam gets the uncle tax and takes money from you first because he hasn't received it yet.
This is not to think, oh, I'm going to get taxed twice. No, that's not a thing. Well, not in this example, but you do not get taxed twice. You just have not yet been taxed on this bucket. So what's the concept? What's the idea? What does it mean to roll over? Well, if you move money from one place to another, it goes like this. Boop. It just leaves one bucket and goes into another bucket. Where has it not gone? Your bank?
It has gone to another place that still has not yet been taxed, which means it is still coffee and creamer and maybe a little bit of sugar. But you haven't had a drink yet. You're still building this.
You're still in the accumulation phase, as they would call it. You're growing, growing the pile. The laundry is building up. It's increasing. Or that's the goal anyway. And that may be one reason to roll it over to. Maybe you are attracted to the idea that this other location could earn you a better return.
Maybe you're enticed by the idea that this other location might. Might be safer than where you are.
Maybe this other location has a better scenario for inheritance. It all depends on what you're trying to achieve. But the idea of a rollover does not tax you.
It's not even the idea. The action of rolling money from one traditional bucket to another traditional bucket of money taxes you not because you haven't taken money out. You've taken no sips of coffee. So what do you get? You get a 1099 R, 1099 Romeo replacement rollover, relocated. Those are what the R mean. It just means that Uncle Sam wants to know where your coffee's going to, what mug is it in before he can take a sip. Because he's following the money ready for, first of all, when you do take it out so he can tax you. Also, one day we're going to get older and Uncle Sam's going to call it in. He's going to say, now, my little friend, I've been very benevolent and very nice and sweet and wonderful and patient waiting as you put money into this bucket on the left. And you have not paid tax yet, but I've been counting it up. And then I know that day when you did a rollover and you moved it to the other bucket on the right.
And I know that it's grown and it's getting prettier and prettier and bigger and bigger. And now one day you're going to turn age 73, or for my. For another group of age, younger group, age 75. And he says, now you've reached the magical age. And I'm going to call it in. Not all of it, but I'm going to require you to distribute money to yourself. That's what they call the rmd, the Required Minimum Distribution. That's when you've got to take money out to your bank or your purse or wherever it's going to go. But you're taking a sip of coffee. He says, you have to do it at that certain age. And again, what do those acronyms mean? R means it's required. You got to do it.
M means it's a minimum.
So a lot of people say, oh, no, I have to take out all my money. No, no, you do not have to do that. It's a minimum. Usually at age 73, it's around 4ish percent of your total balance between all the buckets. So let's say you call me and say, hey, Raina, I have a million dollars.
I like this IRA you're talking about. Let me move 600 to the IRA, but I'm going to leave 400 in TSB. And this is very common because, first of all, many people like to get the best of both worlds. Second of all, maybe my IRA is safe, but can get us a, a reasonable return. But they think that maybe tsb, they can be more aggressive with it and potentially get a much higher rate of return. But it's still risky. So they like to leave some money back over there. So that makes sense. But between the two of them, let's say now fast forward and they're 73, because both plans did really well. And now between the two buckets, there's $2 million when they turn 73. Well, what do they have to remove? $80,000 is 4% of that. Don't quote me by decimal, but the concept is that you have to remove a certain amount, and that amount is around 4%. So if we plan for 4%, let's call it 80 grand. Well, guess, guess what. Uncle Sam doesn't care. Uncle Sam doesn't care what mug he's sipping coffee from. He doesn't care if you take the 80,000 out of TSB on the left or your 401k or whatever bucket that is. He also doesn't care if it comes from the ira. He doesn't care if you take it pro rata, like equal 4% from each one of them. He cares not. All he wants to know is that he's getting tax on the proper amount. So in many cases, people will simply use TSP to take those withdrawals because it's super duper liquid, super, super aggressive. We kind of call it a microwave. Or maybe the other IRA is a crock pot.
So why am I going over this? First of all definitions, when somebody says a rollover, the biggest question is, am I going to pay tax? Absolutely not. If it goes from traditional to traditional. The only reason you would pay tax on a rollover if you were doing something called a conversion. I'm going to do the quickest the. Ooh, can I pick slides? Oh, I can. This is the coolest program ever. Give me 30 seconds. I'm going to give you a slide you've seen before. If you've ever watched me, you have seen this comparison between traditional and Roth.
So if you do a Roth conversion, that is a roll over from traditional, but to a Roth. Remember the rules of the Roth. You've already paid tax on the water that you contributed in, which means if you take it from the coffee to the water, you've to pay the tax on it. But the cool difference is you don't do a tax withholding. So if you take $10,000 of coffee and put it into your water roth, you have 10,000 in the Roth, but you get a 1099 at the end of the year for that $10,000, which just means you pay the tax on it when all, when everything shakes out come tax time. So the benefit of doing that is that you, you've already paid the tax, you've done the inevitable, you've, you've just handled it as time goes by. So do we do both? I love doing both. But the answer is not the same for everyone.
Age is a factor, purpose is a factor, family is a factor, inheritance and when you can actually take the money out. So I don't want to digress too far, but understanding that you're only, you're, you're in general, when you do a rollover, you're rolling it from traditional to traditional. You are not taxing yourself because you're not commonly doing a rollover to a Roth. If you are, it's going to be a little guy, 5,000 a year, 10,000 a year, maybe 20,000 a year, depending on what you're cool adding to your taxable income in that year. Now, don't want to get too deep in here. The idea is rollover equals money goes from one bucket to another. It doesn't tax me, only if I take money out. Now what's kind of cool is I have people ask me, hey, Reena, can I do both at the same time? I want to grab some cash and I want to do a rollover. Absolutely, if it's coming from TSP especially. I am the queen of TSP withdrawals and I can help you navigate that however you want. So the idea is, hey, maybe what I currently have is great, maybe what I'm looking at is greater. But I started off with having multiple, multiple buckets. Remember, I've had people come to me with double digit amount of accounts, right? Especially when I have like a widow or a widower and it was two cup, like two people ending up being just one.
So what's kind of fun is there are certain types of accounts that can be consolidated. Always think water, right? Remember, in jeopardy, there's always saying potent potables. And of course that is not salt water or fresh water. That's a different kind of liquid beverage. But you know that salt water, fresh water and potent potables should always only be in buckets that are similar, right? So you would never drink out of salt water. You would drink out of fresh water. And maybe some will drink a potent potable. But the point is, let's say if you have three Roths, you might consolidate the Roths into one. If you have Three traditional accounts. You might consolidate the traditional accounts. If you have 24 bank accounts, we might reduce the amount of accounts you're dealing with for many purposes. Like I don't want to deal with so many accounts because I'm getting older and I don't want to deal with all this stuff. Plus if I pass away, I want my heirs not to have to be bothered with 27 accounts. I would rather them only deal with five or three or whatever. So there are reasons to consolidate. Those also would be rollovers because you would roll Roth to Roth and usually we'll pick the oldest Roth. Quick note. Because you got to have it for five years in order to not pay the tax on the. Not not pay the tax on the growth. But I digress. And bank money is the same type of money because you will only be taxed on the interest that you earn.
And then of course, traditional ain't never been taxed and Uncle Sam's ready to tax it. So the IRS is smart, but they call it commingling of funds. You can't mix them all up into the same bucket because they got to know how to tax you on one versus the other versus even the other one. So what's beautiful is that maybe we can build up a, a bucket big enough so it's a, a nice potent potable for you when you get older and you can start taking some money out of there and enjoy every bit of it, remembering that one day we are absolutely going to take that money out and put it in your bank. Whether it's quickly, slowly, as you need it, as life happens. That's the whole goal. Reach out to me if you have questions on how to do a rollover, where to roll the money should. Is a Roth good for me? What makes the most sense? Hey Raina, I've got too many buckets. Can you help me consolidate? The answer to all of those is absolutely yes. And I look forward to chatting with you about that to make your life easier and, and much easier for your heirs if something were to ever happen. So you can pass my number to anyone in your family that is going to have to deal with something like that. I would much rather everyone have my number and call me when they need me. I have documents ready to. To handle those things. And my goal also would be to help them manage their own taxes if something happened to you. Reach out. We'll plan for the short term, the middle version is. And also the long term. We'll talk to you soon.
[00:14:18] Speaker A: Thanks for listening to Reyna. Retirement with a strong commitment to ethical standards. Reyna works hard to find the right solution for each individual or family who reaches out for advice. To contact Reyna directly, call 850-450-6500. That's 850-450-6500. Or to reach the team at American Federal Benefits Consultants, call 1-800-872-8857. That's 1-800-872- 8857. You can also go online to americanfederal.org not affiliated with the United States Government. Opinions expressed are subject to change without notice. These opinions are not intended as investment advice, nor do they predict future performance of any product. All information provided is believed to be from reliable sources. However, we make no representation or warranty as to the accuracy of any statement. The information is intended to be educational in nature and does not provide a guarantee, guarantee or specific result. All copyrights and trademarks are the property of their respective owners. American Federal Benefits Consultants is an independent organization, not a government agency or affiliated with the Federal Government or any state government. The terms CSRs, FERs, FELI, and FEHB are all registered trademarks of the U.S. office of Personnel Management. American Federal Benefits Consultants, agents, consultants, or any independent contractors do not provide tax, legal or investment advice and do not engage in the solicitation or sale of securities. Consult with your tax advisor or attorney regarding specific situations.
