How to Maximize Your 401(k) and Avoid Common Mistakes in Retirement with Raphael Hanna – Ep 102

For many people, investing money into a 401(k) is the foundation of their retirement. Unfortunately, most investors don’t fully understand how these plans work or how to take full advantage of them. From contribution limits to employer matches and tax strategies, small decisions made today can have a significant impact on your long-term financial future. Without a clear understanding, it’s easy to miss opportunities and make costly mistakes that could affect your income in retirement.​

In this episode, SHP co-founder Matthew Peck is once again joined by SHP’s Raphael Hanna to break down the fundamentals of 401(k) planning. With years of experience helping clients navigate retirement strategies, Raphael shares practical insights into how these plans function and how to approach them with a long-term perspective.​

Together, they walk through the key components of a 401(k), including how to determine your contribution amount, how employer matching and vesting schedules work, and the differences between pre-tax and Roth contributions. They highlight common pitfalls to avoid and how proactive planning can help you maximize your retirement savings, giving you greater confidence as you approach retirement.

In this podcast interview, you’ll learn:

• The importance of fully understanding your 401(k) as it has replaced traditional pensions for many people.
• How to determine the right contribution amount based on your income, expenses, and long-term goals.
• How employer matching and vesting schedules work and why leaving early could mean losing valuable benefits.
• The key differences between pre-tax and Roth 401(k) contributions and how each impacts your taxes over time.
• Why tax diversification across pre-tax, Roth, and after-tax accounts can provide more flexibility in retirement.
• What to consider when rolling over a 401(k) or using in-service distributions to gain more control over your investments.

Inspiring Quotes

• “When you think about vesting and contributions and the taxation of the different buckets within your 401(k), it’s important to know what’s coming in and if it’s going out, how it is being taxed, and where the dollars are going.” – Raphael Hanna

• “It’s not a set it and forget it strategy, right? As easy as it is to automate your contributions, your investments, whether you’re doing pre-tax versus Roth, your situation can change from year to year.” – Raphael Hanna

• “It’s important to note, if you do a rollover out of the plan, you’ve got to make sure that either the balance gets paid off when you do the rollover or you’ve automated the monthly payments to continue after you do the rollover to make sure that the balance is not default. Those are the two key pieces to make sure that you’re not triggering a taxable event unintentionally by having that outstanding balance.” – Raphael Hanna

Interview Resources

• Fidelity Investments
• Charles Schwab
• Empower
• Agatha Christie
• Pontera

[INTERVIEW]

Matthew Peck: Welcome, everyone, to another edition of SHP Financial’s Retirement Roadmap Podcast. I’m your host today, Matthew Peck. There are over $10 trillion invested in 401(k)s according to the ICI as of 2025. But yet, there are common misunderstandings and common mistakes that people make, or just people don’t really understand exactly how they work and what all the different levers are. Like, what’s the contribution limits? And what are 401(k) loans? And what type of investment options are there? And it’s such an important issue because the fact that the 401(k)s replaced private pensions. So, this is now your pension. This is now your retirement. For majority of Americans, the 401(k) is their retirement, but yet there are so many questions that are there and I think so many missed opportunities.

So, to help us navigate this world of 401(k)s, I brought a specialist, a guy named Raphael Hanna, who he eats 401(k)s for breakfast, basically.

Raphael Hanna: That’s right. Yeah. Cheerios and 401(k)s.

Matthew Peck: So, I couldn’t think of a better guy, but Raph’s obviously been in the industry for a number of years, been working here at SHP, and obviously, he and I worked together on a team. So, that’s another reason why I wanted to bring him on.

Raphael Hanna: Repeat guest.

Matthew Peck: Yeah. That’s very true.

Raphael Hanna: Yeah. Repeat offender, I guess.

Matthew Peck: Very true. So, obviously, he’s psyched to have you come back on the show, to say the least.

Raphael Hanna: Appreciate you having me.

Matthew Peck: And I love the idea of talking about 401(k)s because of, again, how important they are. So, when people come up to you at a cocktail party or whatever that is, what’s the first thing you explain? So, where do you go when it comes to understanding 401(k)s and avoiding mistakes?

Raphael Hanna: I should preface by saying every cocktail party I go to, they talk about 401(k)s.

Matthew Peck: Oh, yeah, because it’s pretty cool. Like, you’re pretty hip.

Raphael Hanna: Yeah. It’s a hop on topic at cocktail parties, but I would tell you when we think about 401(k) plans, I think you hit it on like the nail on the head to start. It’s replaced pensions over the last 20, 30 years. So, when you think about vesting and contributions and the taxation of the different buckets within your 401(k), it’s important to know, one, what’s coming in and if it’s going out, how is it being taxed, and where the dollars are going. So, to answer your question, the first thing that we really think about is I’ll briefly touch on vesting. So, when you go to an employer, and they give you a 401(k) plan, they can potentially offer you what’s called a 401(k) match, right?

So, let’s say you’re contributing up to the annual limit this year, where if you’re up to age 50, you can contribute 24,500. So, on that amount that you’re contributing, your employer can come and tell you, “Okay, we’re going to match, for example, 3% of whatever you contribute.” But what people don’t necessarily realize is there’s something called a vesting schedule. Now, the vesting schedule is predicated on one, you contributing, and then from there, when they do match it, the vesting piece of it basically implies when you technically own those dollars at that point. So, if it’s 24,500, and that’s the contribution limit up until age 50, you need to understand that the 401(k) match piece of it could be vested to you immediately. It could be vested to you over 1, 2, 5 years. So, depending on when you leave an employer, you might be leaving dollars on the table.

Matthew Peck: Okay. So, the vesting schedule is specifically in regards to the match. It’s not what the employee puts in.

Raphael Hanna: That’s correct.

Matthew Peck: This is just about what the employer puts in.

Raphael Hanna: Correct. It’s strictly about what the employer puts in. They can only do it if you are contributing to it, right? And again, the matching piece of it, like I have one client that works at Google. His 401(k) match is up to 10% of what he puts in. So, that’s another piece. It’s understanding what your match limit is. If I contribute three, will they match three? If I contribute 10, do they match up to 10?

Matthew Peck: Now, when you say three or 10, what do you mean?

Raphael Hanna: So, in terms of your contribution if I contribute 3%…

Matthew Peck: Of your?

Raphael Hanna: Gross.

Matthew Peck: Salary or…? Okay. That’s what I’m trying to figure out. So, if I’m going in and I’m enrolling in a 401(k) or it’s like a new job or whatever that is, or whatever your annual, how often you can adjust that, when you talk about 3%, 5%, 8%, 10%, I think you mentioned as an example, that’s how much of your weekly paycheck or your biweekly paycheck gets put in.

Raphael Hanna: Correct. They take that number, and depending on when they were on payroll, so if you elect a 10% contribution into your 401(k) over a 12-month period, they’re going to take that by the pay period, right?

Matthew Peck: But then there are limits, though. So, it’s like, what happens if you… You mentioned about the gentleman with the 10%. Because if the limit is 24,500 for folks under 59.5, if they’re doing 10% of their salary, what happens if they’re earning 500,000? 10% is 50,000. So, what? It just comes off of one paycheck? Or how do they manage that?

Raphael Hanna: It’s a good question. So, the limits, like I said, up until age 50, the annual limit’s 24,500. So, clients that, again, are making north of 300,000, 400,000, 500,000, while we start talking to them about tax diversification. So, if you are making contributions to your 401(k) and you hit that limit, well then, where are you putting other dollars, brokerage accounts, to get that after tax diversification away from whether you’re doing pre-tax 401(k)s or Roth, which we’ll get to in a minute. But again, like I said, up until 50, that’s the contribution limit. And then between 50 and 60, you can make an additional $8,000 contribution above the 24,500 limit. So, your contribution limit becomes about 32,500, and then from that point forward between ages 60 and 63 for 2026, you can make an additional about $2,300 above and beyond then in terms of contributions.

Matthew Peck: Okay. Well, and I think, yeah, I’m just trying to sort of walk through and understand when someone makes their annual elections, like how do they? And then I want to come back to the match and the vesting and whatnot. But it’s like if a client is under 59.5 and their limit is 24,500, do they sort of then take that amount and then go over their salary annually and say, “Okay. Well, 4% of my salary is that equal, annually.” I’m just trying to figure out how do they get to that limit, or how do they figure out how much they should kick in? Should they match three? Should they match five? Or not match, I’m sorry, should they contribute three? Should they contribute five? Like, how do you advise people on how much to contribute into their 401(k)s to begin with?

Raphael Hanna: So, initially, we kind of back into it from a cash flow standpoint, right? Let’s say a client’s making 150,000. You want to first understand what are their other expenses relative to what they should be saving, right? So, let’s say as we kind of back into that number, we find out that 5% to 8% of their savings should go to their 401(k). Well, again, we’re backing into that number based off of what their other expenses are, what their mortgage is. Are they paying for college? You try to figure out what their fixed variable, their fixed and variable expenses are. And then from there, again, we try to project out how much they should be saving based off of what their income is.

So, generally speaking, that’s how we look at it. And then at that point, we say, “Okay, on a pay period basis, this is how much you would be electing.” So, again, on your 401(k) plan, it’s very simple to add those contributions to say, “Okay, I’m going to contribute 5% this year based off of what I earn.”

Matthew Peck: Okay. And they can figure out that 5% on, okay, here’s my annual salary, here’s how much my variable costs are, and this is how much I can actually set aside into the 401(k).

Raphael Hanna: Correct. You kind of back into it.

Matthew Peck: Kind of sense, yeah. It’s going to get that number. All right. So, now I’m either hopefully hitting the limit with my 5%, or I am at least as close as possible, again, budget allowing, like you were talking about. Okay. Now, I’m contributing 5%. What does the company do? And what’s whole match world? And then how does vesting? Let’s go back to the vesting part of it. So, as I said, I’m putting 5% in, now I know there’s a company’s matching something, and now I know there’s a vesting schedule. So, remind me what those are again.

Raphael Hanna: So, the matching piece, right? So, in the example that you used, if somebody’s deciding after they back into their own budget that they should be contributing 5% of their gross salary into their 401(k), well then the matching piece comes in, and depending on the employer, your employer might say, “Okay, Raph, you are contributing 5% of your salary. Okay? Us, as the employer, we’re going to match up to 4% of whatever you contributed into the 401(k).”

Matthew Peck: So, 5% is 20,000, then they’re contributing 4% of the salary, or they’re doing 4% of that 20,000?

Raphael Hanna: They’re doing 4% of that 20,000.

Matthew Peck: Okay. So, then that matches, let’s say, oh gosh, it’s too early for math, even though we’re in finance. This is terrible. But it’s a Monday morning and I would say, you know.

Raphael Hanna: Pats did lose the Super Bowl.

Matthew Peck: Yeah, exactly. So, a little bitter here.

Raphael Hanna: Little wonky.

Matthew Peck: Okay. So, that 4% of that 20,000 is what the company’s giving free money. So, they’re putting in free money right now.

Raphael Hanna: Correct.

Matthew Peck: Right? I mean, that company is just putting on top of that 20,000 that you put in.

Raphael Hanna: Correct.

Matthew Peck: However, there are strings attached with that vesting.

Raphael Hanna: Correct. So, like I said, some employers, depending on how generous they are, they might have that vesting schedule vest immediately to you on day one. So, you could potentially be fully vested on day one. On the flip side of the coin, you could be fully vested a couple of years down the road. So, let’s say, in a random example, your vesting schedule doesn’t happen for three years, right? You’re not 100% fully vested on your match for three years, but you leave your employer two and a half years in, right? Or two years and 11 months in. You potentially, depending on that timeline, you could be leaving a couple of thousand up to thousands of dollars on the table.

Matthew Peck: Okay. Interesting. So, yes, it is free money. However, you need to stay with that firm for a certain amount of time or they take it all back, depending.

Raphael Hanna: Correct. And that information is readily available through your HR department. So, they should be able to get you that information, like pretty quickly.

Matthew Peck: Okay. So, the first thing we’re understanding is how much we can save from our salary into the 401(k). Then we’re figuring out, all right, what’s the matching? What’s the free money that I’m getting from the employer? And how long do I need to stay at this company in order to get all that free money?

Raphael Hanna: Correct.

Matthew Peck: Okay. All right. So, now we have the contributions. We have that amount. We understand sort of the terms on the free money. Now, what about, there’s like Roth 401(k)s and traditional 401(k)s, and, I guess, the taxation.

Raphael Hanna: That’s a big piece of it.

Matthew Peck: So, now how do we figure out what? I guess, what’s the difference there?

Raphael Hanna: Yeah, it’s a good question. So, pre-tax 401(k) contributions, again, you’re making those contributions with basically gross. They’re pre-tax dollars. So, it gets deducted if you look at your payroll before the taxes get taken out. So, if you’re contributing 20,000 into your pre-tax 401(k), when you look at your pay stub, you’re going to see that 20,000, however it gets taken out throughout the year, gets taken out before the taxes get deducted, right? Meaning what? Those taxes are eventually going to become due at some point. Obviously, not at the point of the contributions because, again, it’s on a pre-tax basis. The benefit to that is the tax deduction piece, right?

So, clients that are in the upper tax brackets, they’re going to be looking at pre-tax 401(k) contributions to help alleviate some of the tax burden that they have on their income, right? So, again, generally that’s traditional 401(k) / pretax 401(k)s, and then you get into the world of Roths, where if I kind of use that pay stub example, and you look at your 20K contribution, if that’s going into the Roth, well, that’s done with after-tax dollars. So, you’re paying taxes on that money as you make the contribution, so taxes get taken out, then the contribution goes in, and that money now grows tax-free forever.

Matthew Peck: Okay. Alright. So, now we know that we have Johnny over here, where it’s like we figured out how much we want to contribute. Now, it’s like, okay, do we want to write off that 20,000? Do we want to lower our income by 20,000, which means less taxes now, but now that 401(k), eventually whatever that amount is in there is going to be fully taxed on the way out.

Raphael Hanna: Correct.

Matthew Peck: Or do we pay taxes on that 20,000 now, and, obviously, we suck it up because obviously we know that there’s less money in our pockets right now, but however long-term, that now grows tax-free. And we don’t get paid on the way out on that one.

Raphael Hanna: And sorry, just to add, a huge way we think about it too is like, again, I keep emphasizing tax diversification because I talk to clients about this all the time, where if you look at where the deficit is today. We’re not betting men, right? But if you were, and you said, “In 20 years, where’s the tax code going to be?” Do you think we’re going to be paying higher taxes in 10, 15, 20 years, or lower taxes in 10, 15, 20 years? Probably say higher taxes. Right? So, if that’s the case, right, obviously, you want to be mindful of what I said about pre-tax contributions being tax-deductible, but knowing that you want to, generally speaking, tax diversify your contributions so that if taxes do go up several years down the road, you have some allocated in Roth, you have some pre-tax, and then obviously for the folks that are making above what the contribution limits are, then you’re going to after-tax dollars.

Matthew Peck: Well, you may have just answered my question because let’s just say I got 20,000 to put in. Do I have to do all traditional or all Roth 401(k), or how do I decide what to do, and then can I split it up?

Raphael Hanna: It’s a good question. Absolutely. You can split it up. Employers, if they do offer the Roth 401(k) option in addition to the pretax leave, they make it readily available for you to be able to split your contribution of 50/50, 75/25. Again, you have to look at, again, kind of where you’re at, how close are you to retirement, where’s your existing tax allocation.

Matthew Peck: Almost like you’re outside accounts, you mean.

Raphael Hanna: Bingo. Correct. You got to look at everything, right? And then you also have to take a look and say, and you also look at where your tax bracket is today, “Where are me and my wife currently paying taxes? Are we in the 28? Are we in the 32% bracket?” If you’re in the 32% bracket and you’re, let’s say, in that example, well diversified with Roths elsewhere, well then you would dial up your pre-tax contributions to continue to reduce your taxable income. Another good reason why you might do a pre-tax allocation is let’s say you had a huge bonus this year that you weren’t previously expecting. That’s another way to help alleviate some of the tax burden. So, you kind of look at it on a year-in-year-out basis, and to kind of just go back to your question, you can adjust it pretty easily.

Matthew Peck: Yeah. So, it’s pretty dynamic. Very dynamic.

Raphael Hanna: Yes, totally.

Matthew Peck: But it just shows too, and I’ll kind of pause there for a little bit as a quick sidebar, I mean, it just shows that all these decisions, I mean, it’s not just the, “Okay. Do I want to do Roth 401(k) versus traditional 401(k)?” I mean, you’re looking at all of these outside factors, right? And so, you truly need to take a look at your entire financial picture when selecting these 401(k)s. And I think it’s just a great symbol or very symbolic of what we do here at SHP, which Is take a look at that big picture, take a look at your cash flow, take a look at your outside accounts to see the taxes, take a look at your budget, take a look at your long-term goals. Right? I mean, that’s the type of value that a professional financial advisor will do or fiduciary CFPs that, obviously, we are here at SHP. And I know it’s a shameless plug for what we do, but at the same time, this is our podcast.

Raphael Hanna: It is. So, that’s The Retirement Roadmap?

Matthew Peck: Yeah. That’s what I say. I did at the beginning. So, I think it’s okay to say this, but all joking aside, it’s true. I mean, and it’s exactly what people need, and I just love to provide that value because, as I said, even something like the 401(k) shows how complicated it can be.

Raphael Hanna: It can be. Yeah.

Matthew Peck: And you have each step to take and you have each decision to make. And if you don’t have someone to kind of help you make those decisions, then you will make mistakes, or you’ll certainly miss opportunities, right?

Raphael Hanna: And just to kind of put a bow on it, it’s not a set it and forget it strategy, right? As much as easy as it is to automate your contributions, to automate your investments, to automate, whether I’m doing pre-tax versus Roth, well, your situation might be changing year in, year out, right? So, forget the investment piece for a second, but understanding how much you’re contributing, whether I should be increasing my contributions, decreasing them. Should I be doing Roth? Should I be doing pre-tax depending on where my income is, right? Those are huge things, and obviously, the match is a huge piece of it too, because, like I said, for whatever reason, if you leave an employer and you’re two months shy of your vesting schedule, you might be leaving thousands of dollars on the table, and you don’t even know it.

Matthew Peck: No, absolutely. No, and it’s a great point, but let me go back now to what you just said as well, because to kind of go through that timeline, right? So, now I know how much I’m contributing. Now, I know what my vesting sort of schedule is, or sort of like the details there. Now, I know what the taxation is. What about investment options? Because you talked a little bit about it just there. So, now how do I invest this money?

Raphael Hanna: So, it’s funny. The way I talk to clients about 401(k) plans all the time, it’s interesting because the 401(k) world, it’s a business, right? So, I’ll use Microsoft, for example. If you work at Microsoft, Microsoft’s probably going to pay for a Cadillac plan for their employers or their employees, I should say. So, their 401(k) plan is probably going to have some pretty solid investment options at a low cost. They’ll probably give you a Roth 401(k) option. They’ll potentially let you do something called backdoor Roths as well. You know, the better the 401(k) plan is, the lower cost the funds are, the potentially better investment options you do have available to you, but that’s not for every company you work at, right?

If you work maybe for a small mom and pop shop, their 401(k) plan might not be, like I said, the Cadillac plan that’s giving you low-cost investment options, that’s giving you a Roth 401(k), that’s giving you options. Maybe we’ll get to the loan piece in a second, where if, you know.

Matthew Peck: Yeah, no, I definitely want to get to the loan half of it.

Raphael Hanna: Yes, totally.

Matthew Peck: I want to talk about sort of like standard stuff, and then I do want to talk about the loans to help us understand that. Keep on going.

Raphael Hanna: So, like I said, it comes back to the type of plan that you’re in. So, you need to understand what that looks like, and from an investment standpoint, that’s the biggest thing that we’re looking at. We’re trying to look at, again, best-in-breed funds within your 401(k) that are at a relatively low cost, right? So, again, it also depends on where in the lifecycle you are of your retirement journey. Are you two years down from retirement? Are you 20 years out from retirement? And one thing we try to tell clients all the time is if you are two to three years out from retirement, well, if the market pulls back, we’d be very reluctant to make any drastic changes if you’re already well allocated.

And that’s something that I’ve seen clients make mistakes on where they’re like, “Okay, my 401(k) is call it 65/35 stocks to bonds. I’m two years out from retirement, and the market’s down 10%. I’m going to go to all cash.” Well, you’re potential, like again, we talk about this all the time, time in the market versus timing the market. So, from an investment standpoint, we always try to, as advisors, loop clients in, even though we might not be managing 401(k)s but trying to co-manage that piece of it with them to handhold them through certain market volatility moments and also try to make sure that they remain well allocated during those times.

Matthew Peck: Well, and I was going to say too, I mean, I think an easy hack is something they developed recently is what’s called a target-date fund or TDF. And target-date funds, what they’ll do is they’ll have target-date fund 2060 or 2040 or 2045. And that’s the year that that individual, that employee is going to be turning 65. So, it’s meant to sort of be rebalanced. So, like a 2045 target-date fund right now might be a little bit aggressive because it’s 20 years from now, but as 2045 the year nears, it becomes more and more bonds. It gets sort of rebalanced towards a more conservative portfolio through time.

Now, that’s, again, a very easy hack, easy win, depending on the situation. However, if you do have sort of financial advisors in your corner, then you’re not doing sort of like the easy way out, if you will. Then they’re taking a look at the actual holdings that you have, and then we’ll match them up to our portfolios. So, SHP, we have our core portfolio as moderate and things like that. Now, we might not be able to have the exact funds that we would prefer because we’re limited by the 401(k) provider. However, we can match it pretty well.

Raphael Hanna: Pretty close.

Matthew Peck: Exactly. And that’s just part of the benefit, again, of having a guy or a gal in your corner.

Raphael Hanna: Absolutely. And just another thing to keep in mind too, with 401(k)s, specifically with Fidelity, right, because we work with a lot of folks that have Fidelity 401(k)s, this concept of like a brokerage link. And not a lot of clients might be familiar with it, but it’s a way for you to basically open, again, I’ll use the word sub-account within your 401(k). And rather than investing in just the menu, we’ve called it 15 to 20 options that the 401(k) plan provides. Well, now, the floodgates potentially can open and you can hand select certain stocks, hand select certain bonds that are outside the scope, potentially, of what those 15 to 20 options are just in the 401(k) plan.

So, again, there’s a lot of nuances to 401(k)s outside of just logging onto Fidelity and seeing what’s available to you. Loans, brokerage links, there’s all these different things available, and it’s just important that clients actually take the time when they do sign on to a new employer or with their current employer to understand what that vehicle is and what it can provide them.

Matthew Peck: Oh, absolutely. Okay, so let’s go full circle here, and then I’ll eventually get back to the loan. So, now, we have figured out how much we want to put in. We’ve got the match from the company, we’ve got the taxation sorted out, we have the vesting schedule sorted out, and now we have the investments sorted out, whether it’s a target-date fund, brokerage link, assistance from a financial advisor, so forth and so on.

And now, I’ve just turned 60 or 62 or 65. How do I get out of a 401(k)? What happens? How do I exit out of this? Whether it’s an old 401(k), let’s say I left the company 10 years ago and I’m still working, or I’m 65 and now, I want to retire. How do I get out of the 401(k)?

Raphael Hanna: It’s a good question. So, as you know, every 401(k) plan, right, is held with a custodian, whether it’s Fidelity or Schwab or Empower, whoever your employer used for their 401(k) plan. So, unless that changes, which really it does, the first step you would take is to call your 401(k) plan provider and just get a little bit more information as what’s my current balance? What’s my pre-tax allocation? What’s my Roth allocation, right? You kind of just want to understand, if you haven’t viewed the plan in a bit and you’re trying to get out of it, kind of where are the basic figures? Where am I at? What’s my pre-tax Roth allocation? And then from there, you kind of work with whoever you get at the 401(k) plan department to say, hey, I want to roll this out.

Now, there’s a few ways that can happen, right? And you can potentially roll it out directly, direct deposit, if you will, into your IRA or your Roth, right, depending on what you have in each bucket. Or they might tell you, hey, we got to cut you a check, right? At which point, you would just make sure that you try to get that deposited within 60 days, right? So, there’s a few things there where if it’s a check, you want to make sure it gets deposited within a timely manner. But if it’s direct deposit into your IRA or Roth, well, then it’s a relatively straightforward process, overarching the reason why you do that, again, is for the flexibility of how you can invest the funds in your IRA or your Roth IRA, because like we said, generally speaking, your 401(k) plan is like limited to 15 to 20 fund options.

So, the biggest advantage that we tell clients is, rather than going to a steakhouse where everything’s kind of– or let me rephrase. The best example is your IRA and your Roth is kind of like a steakhouse, right? Everything’s kind of à la carte. You can kind of hand select the things that you want to invest in, you want to, I guess, eat, if you will.

Matthew Peck: Yeah, absolutely. No, keep it coming. I haven’t had breakfast yet. This is great. I think I’m hungry.

Raphael Hanna: I think I’m hungry is the biggest takeaway there. But again, generally speaking, the biggest reason why clients move it to an IRA and a Roth is for the flexibility of how they can invest the funds.

Matthew Peck: Okay. Yeah, right. They have complete independence there.

Raphael Hanna: Yes. Autonomy with how they invest.

Matthew Peck: And as a reminder for all of our listeners, so IRA is an individual retirement account, and then obviously, Roth IRA is that after-tax or tax-free individual retirement account. So, your 401(k) funds, depending on the tax status, will get split between those two accounts. So, you need to have IRAs or Roth IRA accounts open, ready to receive the funds. And not to get too wonky, but some of the 401(k)s even have after-tax dollars in there, like brokerage account dollars. So, it can get a little…

Raphael Hanna: You can spend a separate day on that.

Matthew Peck: Yeah, absolutely. But how that works and you talk about backdoor Roth IRA. So, there’s almost like, maybe we’ll have it come back and do kind of like 401(k) part two.

Raphael Hanna: Some breakdown.

Matthew Peck: Right, yeah, because there really is some extra nuances, like you were saying before. And right now, my goal is just the basics, just to make sure everyone understands it. And then, primarily, people will do it when they retire, when they’re 62 or 65 or 60, whatever that is. Or if they’ve left that employer and they’re still in their 40s and 50s and have an old 401(k). But you mentioned about the steakhouse and about how with IRAs and Roth IRAs, you have complete sort of autonomy to do whatever the heck you want to do, whether it’s funds, individual stocks, individual bonds, CDs, you can do whatever the heck you want to do with it.

And primarily, as I said, people will do it when they retire, when they’ve left that job. However, there is something called an in-service distribution. What is an in-service distribution?

Raphael Hanna: So, the best way to think about an in-service distribution is if you are of the age, let’s say you’re older than 59 and a half, okay? Specifically older than 59 and a half, you can do what’s called an in-service distribution or rollover, where you can now roll over your outstanding balance, right, whatever your 401(k) balance is, into your respective traditional IRA or your Roth IRA, depending on how much you have in each bucket, right? So, it’s a way for clients, if they’re still working into their 60s, to give them better flexibility by investing those dollars in their personal retirement accounts.

Now, that’s not to say you’re going to get rid of your 401(k). You’re still going to make those contributions. You’re still going to make those decisions based off of everything that we’ve talked about, how much I put in Roth, how much I put in pre-tax, what’s my investment allocation, all these things. You’re still going to do that in your 401(k). Future contributions will still go into it, but the balance is something that you now can basically slide over into your IRA and your Roth to give you a better idea of how I can invest these funds with, again, we call them best in breed funds, right? We’re kind of doing the due diligence at SHP to say, okay, does this international fund match up with our expectations? And we can kind of hand select certain funds on our end? And then, again, clients can also do that. So, that’s the biggest reason.

Matthew Peck: Yeah. And I think my takeaway for all of our listeners is the fact that you don’t necessarily have to be retired or severed employment in order to take it, to sort of take control of your 401(k). It can happen while still working. Now, there are limitations, 59 and a half, and there’s some fine prints age-wise and different things, and sometimes even company-wise. But just something to explore and to consider because in a perfect world, we generally would love, I mean, obviously, it’s early as possible, but especially if you’re considering retirement. I mean, we want to be sitting with you two years, three years prior to retirement just to get all of our ducks in a row. And I said, we can still see people after they retire, don’t get me wrong. But in a perfect world, we see people beforehand and then we consider things like in-service distributions. We consider different ways of getting more control and more of an alignment between your entire financial picture and what is, generally speaking, most people’s biggest nest egg in the 401(k).

Raphael Hanna: Correct.

Matthew Peck: So, yeah, so in-service distribution is something to consider besides, of course, again, if you’re just retired or if you have severed employment, then we’re talking rollovers, which all of these things are tax free, by the way, generally speaking. We’ll get questions like, oh, is it taxable? Like, no, it’s going to go from custodian to custodian. It’s going to go from your 401(k) provider to your IRA custodian. It never goes into your pocket. As long as it doesn’t go into your pocket, it’s not a taxable event.

Raphael Hanna: Yes. And just to go back to the whole pre-tax Roth piece, it’s very important that you understand when you jump on a rollover call with the custodian to understand what amount is in your pre-tax versus Roth because you don’t want to commingle those assets, right, and then have, let’s say, Roth money go into the pre-tax portion that you deposit into your traditional IRA. You want to siphon out the difference and make sure you’re routing the correct dollars into the correct bucket to avoid any confusion.

Matthew Peck: Yeah. No, absolutely. Or getting a massive tax hit that was unintentional at that point.

Raphael Hanna: Correct.

Matthew Peck: Okay. So, we’ve now covered from sort of the beginning to the end of the lifespan of a 401(k). All right, you want to give us some information on 401(k) loans?

Raphael Hanna: Yeah, that’s the fun stuff.

Matthew Peck: Well, yeah, because think of it this way, folks, it’s like, where I went from a normal situation, right? You start work, you start making contributions, you get in your match, you’re making sure you’re vested, you’re looking at the taxation, the tax diversification. You’re managing your investments, either yourself or with a financial advisor. And now, either as you retire or as you approach retirement, you’re either doing a rollover in-service distribution.

But what happens in the middle of that if there’s an emergency? But what happens in the middle of that and you need to access your 401(k)? Can you? And so, Raph, can you?

Raphael Hanna: Yeah. So, again, it depends. Isn’t it always dependent on me?

Matthew Peck: Oh, absolutely. Yeah. Their world, yeah.

Raphael Hanna: We always say it depends.

Matthew Peck: Love that. Love that.

Raphael Hanna: But again, going back to the whole concept of what does your 401(k) plan offer, some 401(k) plans do offer a provision where you can take a loan amount out. And usually, they limit it, I believe, up to like 50% to 70% of what the outstanding balance is on your 401(k) plan. But again, potentially, yes, and the mechanics of that is important to note if you do elect it because, again, we’ve run into this with clients before where if, let’s say you do do a rollover or you do do an in-service rollover out of the 401(k) plan, but you do have a loan on it, outstanding loan balance, you need to make sure one of two things happen.

One, that it gets paid off, right, before you do a rollover. Or two, if you do a rollover out of it, and there’s still that outstanding balance that you’re continuing to make the minimum monthly payments on that 401(k) loan, because what happens if you don’t do one of those two things, the loan will default and become a taxable event for the outstanding balance.

Matthew Peck: That’s no good.

Raphael Hanna: So, that’s no fun. Nobody wants that. So, it’s always important to know and double check, because let’s say you’ve been at an employer for 30 years, maybe you took a 401(k) loan for a small portion of it 20 years ago and you were making minimum monthly payments for a long time and you didn’t know that that balance still existed potentially. It’s important to note, one, if you do a rollover out of the plan, like I said, you’ve got to make sure that either the balance gets paid off when you do the rollover or, two, you’ve automated the monthly payments to continue after you do the rollover to make sure that the balance is not default. So, those are the two key pieces to make sure that you’re not triggering a taxable event unintentionally by having that outstanding balance.

Matthew Peck: Well, I think I’ll kind of leave it as a cliffhanger because I wouldn’t mind kind of having some time to– yeah, that’s a cliffhanger, Jamie. Yeah, absolutely. There’s 401(k) loans and then there’s Agatha Christie, and I’m going to go 401(k) loans on this one. But no, but all joking aside, it’s like, I mean understanding 401(k) loans because I have so many questions, but okay, it comes out of your pay stub. Why is a 401(k) loan better than sort of doing a home equity, if you have that option?

We briefly talked about backdoor Roth IRAs or backdoor Roth contributions, which also can be used with the 401(k). And then there’s companies called Pontera and different things that allow all these options. So, I think it’s almost like I’d love to have you back, basically.

Raphael Hanna: Yeah, absolutely.

Matthew Peck: Kind of have like more of a complex dive into the 401(k)s because, again, the loans, the post-tax contributions, all the limits on the different ages and things along those lines. But I think this was a good day to, again, from beating to end with the potential loans in the middle because it’s also hardship withdrawals too. And if you’re disabled or for a first-time homeowner…

Raphael Hanna: Generally, get into that, yeah.

Matthew Peck: Yeah, exactly. There’s so much more that we could really get into when it comes to the next level of 401(k) planning, and then really, 401(k) understanding. But I think we did a good job of just making sure people are not making the mistakes, i.e., taxable events, right, whether it’s through not curing the loan or whether it’s doing a rollover inappropriately.

Raphael Hanna: The match piece too, making sure you’re not leaving money on the table.

Matthew Peck: Right, exactly. Or just walking away from some of that free money through the vestings. And hopefully, we did a good job, too, of clearing up some of the misunderstandings that are there and how 401(k)s work because, as you said, the beginning, Raph, I mean, this is the replacement for the pensions. All of our grandparents and parents had pensions and they all stayed at one company, generally speaking, for their entire life.

And so, now, you don’t need me to tell you this, it’s a completely different world. And if 401(k) is sort of the bedrock of your retirement, you better understand them and you better make sure that you’re not making the mistakes and missing out on opportunities. So, I hope all of our listeners found this helpful and put up with all my silly jokes. Was it all right, Raph?

Raphael Hanna: Not too bad.

Matthew Peck: Will you come back on?

Raphael Hanna: Of course, man. Come on. Yeah.

Matthew Peck: This is awesome.

Raphael Hanna: This is a team, man.

Matthew Peck: Yeah, which ironically, yeah, I wouldn’t even tell you that, our internal team name. It’s for a different…

Raphael Hanna: Well, save it for the next podcast.

Matthew Peck: Yeah. Cliffhangers, ladies and gentlemen.

Raphael Hanna: That’s it.

Matthew Peck: So, thank you all for listening so much, lending us your ears. And hope everyone has a wonderful day.

[END]