Video Transcript

You’re watching Module II of the eight biggest 401(k) mistakes. Similar to Module I- we’re going to do this with a PowerPoint presentation and my voiceover on that presentation. So, we’re going to get started here with mistakes number five. Thanks for coming and I look forward to sharing this information with you.

We’re going to start with mistake number five.

So, we begin Module II with mistake number five rolling over after-tax dollars. Now, why on earth would have after-tax dollars in any qualified plan?

Well some 401k’s, as we learned in Module I, allow rules. They have different rules. They allow some participants or all participants to invest excess money if they choose to.

So, you’ve contributed the maximum into your 401(k) and you have extra money and you want to invest it. So, you put into your 401(k). That money is going to go in on an after-tax basis.

This is usually seen in higher-income earners, and the reason why they do it is so that the interest or the growth in the accounts are on a deferred basis so that that growth is not taxable. Here’s the problem. The problem is in keeping the money separate. You got qualified money with non-qualified money, and the difference between the two is glaring.

One goes in after-tax, the other one goes in before tax. So, the accounting of that is critical.

If the plan custodian, the administrator of the plan or whoever is holding the proceeds don’t keep a separate accounting of those two forms of assets, the end result is that tax money is going to get taxed twice when it comes out in the form of distribution.

What would happen when you’re 65 or at retirement or whenever you leave, guarantee it to happen at age 70½. So, if you roll this money over to a new plan because your employer went out of business; for instance, as you learned in Mod I, you can put that money into the new 401(k).

Well, that new 401(k) plan administrator needs to know which money is taxable and which money came in after-tax. If they don’t, it is all deemed to be taxable or before-tax money, and as a result, it’s going to come out all taxable.

So, the effect is that you’ve been taxed twice on those funds. How do you avoid this mistake? Not doing it. Inside of asset protection training modules, there are all kinds of places to put money that in excess contributions. So, you can put the money anywhere. So, just simply avoid this mistake and just don’t do it.

Okay. Mistake number six then is the beneficiary. We see all kinds of errors here; and frankly, I believe these are the ones that cause the biggest problems because everybody’s good intentions can be overridden by the wills or wants of beneficiaries.

So, beneficiary designations- first and foremost, you need to know that they override everything. Okay. If you created the will and you think that that’s the end of the deal, you’re mistaken. The beneficiary designation in your 401(k), your IRA and we’ll take this even deeper, annuities, life insurance, anything that has a beneficiary designation needs to be reviewed annually life changes.

So, if your will says one thing but your beneficiary designation say something else, it’s the beneficiary designation that’s going to override anything that happens- trusts, as well as divorce decrees and pre-nuptials.

In addition, oftentimes somebody is going to want to have a non-spousal beneficiary. Well, this could be a trust that’s a non-spousal beneficiary.

Once again, if a document that’s sending the money to a trust doesn’t specify that the beneficiary is not to be the spouse but supposed to be somebody else, the document, the 401(k) is going to override that.

You might want to bypass the spouse because the trust is going to take care of them and give these qualified dollars to your kids where you’re going to implement the kiddy tax. IRS doesn’t like generations skipping documents.

In fact, they feel like they’ve been cheated, so the money gets taxed as if it were distributed to the original beneficiary and then it gets taxed again to the child beneficiary.

That’s called the kiddy tax. What this does ultimately just offers much fewer options from a planning standpoint. So, this can easily be fixed, easily be avoided by reviewing your beneficiaries on an annual basis.

All right. Mistake number seven are the advisors. This often is a very large mistake. First off, lots of folks with 401(k) specifically count on the employer.

Frankly, the Pension Protection Act of 2006 required the employer to be this thing called the fiduciary, meaning that they have a responsibility to all plan participants to provide with advice.

However, if your employer is a plumber, that puts this upon somebody who is a plumber, not a financial advisor.

So, counting on your employer even though the law says he’s supposed to provide you- you know, with advice, really is a mistake. They need advice just as badly as you do, and if you are the owner of the plumbing firm, understand that you have the responsibility providing your staff and your employees or the participants in your plan with advice.

Not doing so can cause you some pretty big problems on both sides of that fence. This is an issue that can be avoided by simply contacting or getting in contact with somebody who’s trained and educated in the 401(k), and specifically the qualified plan marketplace.

Co-workers: Well, what can I say about this?

If you work in cubicles, you hear somebody talking to their spouse, or you talk to each other. Most likely you’re standing around the water cooler, the coffee machines, outside smoking or whatever it is you do, and you ask everybody what’s going on with their 401(k)s and what they’re doing. You tend to follow the herd- I call this the herd mentality, just doing what the other co-workers are doing. This is the same problem as having your employer be the advisor in your plan.

Those folks need as much advice as you do, and can be very persuasive sometimes. Doing this, however, is often a very big mistake.

Friends, family and relatives- I don’t think I need to say a lot more here. You know, you got a friend or a family member that’s also in the financial business and they have become an expert in something; but it may not be in the taxation or the proper allocations or all the stuff that we’ve talked about through Module I and Module II.

I would caution taking advice from these folks even though they’re trusted and maybe very honourable people. The reality is this is a very complex area and requires a bit of specific advice so seek that out and try to avoid specifically these three.

How about the past performance of 401ks? We addressed this a little bit in Module I. Past performance is not indicative of future results. They say that for a reason. Past performance is not going to tell you what the future is going to hold.

In fact, there are studies done that prove otherwise. So, if the last fund that you picked was the best fund 10 years ago, it’s likely not to be the best fund in the future.

So, reviewing your 401(k) often is important, not just picking something and making sure or hoping that the best outcome comes from that. Past performance is often a very big mistake that people make. Typically what these co-workers talked about, and these friends and families are going to offer you from an advice standpoint because it kind of makes sense; but from a testing perspective, it is the wrong thing to do.

Then unrelated advisors: Well, gosh, who’s unrelated to your 401(k)?

Your employer is related in some respects because they developed the plan, but it’s your money, so the ultimate (on this) is upon you to make sure that you’ve done the right things that fit your needs because you’re an employer and you may have different wants and goals, different tolerances to risk and all that, the same thing with the co-workers.

Unrelated advisors certainly apply to the friends, family and relatives category. Other unrelated advisors are going to be your property and casualty agent that is in the life insurance business. All right. That’s an unrelated advisor. Taking advice from folks like that is a mistake. They don’t have a vested interest in your plan today. They do when you move it out.

For instance, when you terminate your employment for some reason like: the employer stops the plan or you changed jobs, things of that nature. There’s an interest in it. At that point, you know, you hopefully have growth. So, unrelated advisors, all those people around you that provide you with advice that doesn’t have an interest in the specific plan that we’re talking about.

Let’s move on to mistake number eight then.

Mistake number eight is working with amateurs. I underlined that. Working with amateurs refer to step number seven. Specialists do exist. There are not many. They are out there. You can find them simply by Googling somebody in your area or landing on places like this website that you’re on, Asset Protection Training. Specialists do exist.

The qualified market, be that from an IRA all the way up to an ESAP, all of those have different aspects to them and different requirements; and it requires someone who only does this kind of work. They exist even if you are a planned participant with a small account value. There are specialists out there that can advice you with respect to what you should do and how you should do your allocations to your 401(k).

So, pick somebody other than everything listed in mistake number seven. There are specialists out there. This is a great venue to find one, Asset Protection Training dot com. So, that’s going to end our tutorial for the day.

This is Module II and we start out with mistake number five. Okay. At the end of Module II, we concluded our eight biggest 401(k) mistakes program and how to avoid those mistakes.

I want to emphasize that there are far more than eight mistakes that can be made inside of any kind of qualified program, and you really got to pay attention to what’s going on out there.

If you’re not qualified to do so, if you don’t feel like the people around you are advising you appropriately, there are places like this website to seek out good quality advice.

This is a big deal with respect to the qualified money and your future, so making those decisions and making the right ones and avoiding really easy mistakes is really the goal of the course, and hopefully, you got something out of it. My name is John Vucicevic and thanks a lot for joining me today.

• 401K Employee Basic
• 401K Mistake part 1
• 401K Mistake part 2
• IRA Tax Basics
• Roth IRA 101
• Convert IRA to Roth

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