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This engineering professional had accumulated a good-sized 401(k) with a large public firm and had a desire to remove as much of his accumulated retirement wealth from the risk of any Wall Street market exposure as possible.  The description on his account statement that he was “100% vested” lead him to believe that he was in complete control of his retirement funds.  The reality, however, was that the company for which he worked and the custodian that held his funds would not release a surprisingly large portion of his retirement wealth despite classifying it as 401(k) to IRA rollover.

In this scenario, my client found that he did not have the control and freedom over his 401(k) account that he had assumed.  I also suggested to both husband and wife, that adding funds to your 401(k) beyond netting the benefit of “free money” that your employer may match, significantly lessens the benefits of this type of qualified for tax-deferral retirement account sponsored by the government.  In fact many people don’t realize that there is a “phase out”(1) level to participating in qualified programs where contributions beyond a certain level lose their tax-deferred benefit.  In fact, once you reach certain income levels, qualified for tax-deferral programs are prohibited.  I suppose the government assumes that once you make a certain amount of money annually, you really don’t need any tax breaks; as if it were any of their business how much money your hard work and dedication yields your family.  But I digress…

With this new information in mind, we directed the client to contribute to his 401(k) up to but not in excess of the employer’s dollar-for-dollar match.  Once into retirement, the government might take nearly 40% in taxes if the client’s taxable earned income levels are high enough, but most of that was provided by the employer.  Their contributions are intact and they still benefit from what is left from the employer’s match and the remaining portion of the gains that came with the blended funds.  The client rolled the remainder of his retirement funds into an account that grows tax-free, can be accessed prior to 59-1/2 without penalty or tax, and isn’t subject to required minimum distributions at 70-1/2 nor the fines leveled at 50% per year assessed for not observing RMD’s.  Yes, that’s a really deep penalty on wealth that is supposed to be yours for retirement!

After much inquiry, follow-up, and elapsed time with both company and custodian they permitted him to “rollover” a portion of his funds, which are no longer subject to a loss of value due to a downturn in market values on Wall Street.  I was able to match the client with an account that protected his values as well as provided the opportunity for good returns.  He was also granted an account bonus as a flat up-front rate which will be honored for the first seven years of his account.  As additional funds become available to transfer from his 401(k) in subsequent years, he is eligible for the same rate of bonus when he transfers additional amounts to his new, and independently controlled, IRA account.

Conclusion: In the current turbulent financial environment it can be advantageous to have an account that maintains tax-deferred status, but with a custodian that is beholding to you and the contract you hold with them rather than any third party.  It is worth taking the time to review your retirement and wealth building strategies to become more familiar with the actual rather than perceived function of account provisions.  The real status of your account and accumulated wealth may influence your focus and selected strategy decisions going forward.

(1) 2018 Phase Out Limits –

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