4 Things to Know Before Doing a 401(k) Rollover with Raytheon (RTX)
A 401(k) rollover occurs when you move a retirement plan with a former employer into an Individual Retirement Account (IRA) or another retirement plan with your new employer. It is also common for a retirement plan to allow you to do this when you reach age 59 1/2, even while still working for that company. You will see advertisements telling you to rollover your old retirement plan, but these commercials fail to cover the things you need to consider before doing a rollover. Throughout this writing, we will cover the four most important things to consider before rolling over your Raytheon Savings Plan.
Key Questions:
· Do you own Raytheon stock in your 401(k)?
· Do you have a loan against the Raytheon Savings Plan?
· Are you under age 59 1/2?
· Are you satisfied with the investment options in Raytheon Savings Plan?
Do you own Raytheon Stock in your Raytheon Savings Plan?
For those currently working for, or looking to retire from, Raytheon, it would be realistic to assume that you hold some Raytheon (Ticker RTX) stock in your Raytheon Savings Plan. If that applies to you, then pay extra attention to the net unrealized appreciation (NUA) which is an IRS distribution option that allows for potential tax savings. Unfortunately, many Raytheon employees have never heard of NUA and simply sell the Raytheon stock portion when doing a Raytheon Savings Plan rollover.
NUA is the difference between the original cost basis and the current market value of shares of Raytheon stock. This will be important for those with highly appreciated Raytheon stock in a tax-deferred retirement plan such as the Raytheon Savings Plan. This will apply to those who have owned Raytheon or previously United Technologies in their retirement plans over many years as the stocks have significantly appreciated. The main benefit is that the IRS offers a more favorable capital gains tax on the NUA portion of Raytheon stock.
It can be confusing to understand, so let’s use an example. Let’s just assume you worked for Raytheon or United Technologies for many years. You purchased shares of stock in your 401(k) over the years and you paid $10,000 over time to buy this stock. This $10,000 is now known as your basis or cost basis. The Raytheon stock is currently worth $100,000. Therefore, when you subtract your basis ($10,000) from Raytheon’s current value ($100,000) you have a gain of $90,000 on your Raytheon stock.
In addition to the Raytheon stock, you also have other investments inside of the Raytheon Savings Plan worth $200,000. This gives you a total Raytheon Savings Plan balance of $300,000. If you follow the proper procedures of NUA, you could pay long-term capital gains rates on this $90,000 gain at 0% Federal tax. The cost basis of $10,000 would be taxed as ordinary income in the year that you process the NUA distribution. The other Raytheon Savings Plan investments would be taxed as ordinary income (just like all other 401(k) distributions based on your tax rate in the year they were distributed). Or you could rollover the investment fund proceeds to an IRA to defer their taxation.
To take advantage of these tax savings, you would need to distribute the entire Raytheon Savings Plan in the same tax year. This means the account must be fully withdrawn (to $0) by the end of the tax year you elect to use NUA. To be safe, you should start the process at least a month before the end of the year to ensure the transaction is processed in time and you don’t lose out on the savings. The company stock portion would be sent to a brokerage account of your choice and the additional investments would be liquidated and a rollover check would be sent to the IRA of your choosing. If you do not already have a taxable brokerage account and Traditional IRA, you would want to open them prior to the NUA transaction being completed.
Now let’s cover the restrictions on utilizing the NUA. First, you need a triggering event to take advantage of the NUA and there are four potential triggering events. These include death, disability as defined by the IRS, separation of service from the company, and attainment of age 59 1/2. In the case of death, the benefits will be passed on to your beneficiary (typically your spouse) as they will inherit your 401(k) and they could possibly take advantage of NUA. When we say disability, it means that you no longer work at the company so if you are still working there then you likely don’t meet the necessary conditions.
Another restriction is that if you processed a prior rollover after separating from service, you will need to wait for another triggering event to process an NUA distribution. For example, you separated from Raytheon at age 55 and took a small distribution to pay some bills. Then the following year you met with a Financial Advisor and now want to explore NUA. Since your retirement was your first triggering event and you didn’t complete a lump sum distribution that year, you would not be eligible for an NUA distribution. Fortunately, because there are additional triggering events of death, disability, and reaching age 59 ½, you could then wait until you reach age 59 ½ to process an NUA distribution.
The final restriction, which was mentioned above, is that you must fully distribute or roll over the entire account balance out of the Raytheon Savings Plan by the end of that year. There can’t be any money left in the retirement plan. For this reason, even if you are age 59 1/2 and qualify to use NUA, you wouldn’t want to do so until you have left that company. Now that you know the restrictions you can evaluate whether you want to take advantage of NUA and if so, plan for the best way to do it.
As earlier stated, you may be able to pay 0% tax on the capital gain on this stock. Currently, for single/married filing separately filers with taxable income of less than $41,776 and joint filers with taxable income of $83,551 there is 0% tax on long-term capital gains and qualified dividends. Although taxable income occurs after deductions such as the standard deduction and over 65 deductions. Therefore, if you are retired or not currently working, then it would be a good time to take advantage of the 0% capital gain. Additionally, you do not have to sell all of the stock in the same tax year. You could sell it over a few years to keep yourself in the 0% capital gains bracket. You just have to be careful as tax rates are subject to change.
If your taxable income is higher than the limits mentioned above, don’t worry as NUA could still be a good deal as long-term capital gains rates then go up to 15%. This is especially true for those people in retirement who will end up paying 22% or higher in federal tax, plus any state tax that would apply. At a minimum, this could be a 7% savings between paying 22% Federal Income Tax and 15% Federal Capital Gains tax. Unfortunately, taxes are complex and get even more difficult to understand in retirement. It would be a good idea to get some help from a financial planner or accountant regarding this.
If you consider yourself a high earner, then you will want to know this as well. If you take advantage of your NUA when on Medicare, then you may incur an additional Medicare surcharge fee that is abbreviated as IRMAA. IRMAA stands for “Income related monthly adjustment amount” a fee that you will be subject to if you are filing single and have income over $91,000 or filing jointly and have income over $182,000.
To know if NUA makes sense for you then there are a few pieces of information that you need to analyze. First, you will want to figure out your cost basis on the Raytheon Stock that you own. If you cannot locate it on your statement, then you can call your 401(k) provider and ask for it.
Another is how much of your 401(k) consists of this stock? It is never a good idea to have a significant portion of your holdings in a single stock for many reasons. Even great companies see stock price declines and you don’t want to jeopardize your retirement. An example would be when Raytheon announced the merger with United Technologies and experienced a large sell-off. Therefore, you’ll want to monitor your account for these scenarios and possibly use stock puts to hedge your downside risk. A large stock price decline could wipe out the tax benefits of utilizing NUA.
Do you have a loan against the 401(k)?
There are many arguments both for and against taking a loan against your 401(k). Some believe that taking a short-term 401(k) loan isn’t a bad idea as there are potential cost advantages and repayment flexibility. While others believe that the negative impact on investment performance and tax inefficiency makes it a bad idea. Regardless of which side you take, there are steps you need to take before doing a rollover if you have a current loan on your 401(k).
If you have a loan with your Raytheon Savings Plan, then you should pay it off before you do a rollover. This is because the remaining loan balance is potentially taxable to you if you don’t pay it off first. Let’s say you had $100,000 in a 401(k) with a $20,000 loan balance and you process a rollover request. You would receive $80,000 that could be rolled over and the $20,000 would be taxable to you at your ordinary income tax rate for that year.
Typically, you will have 60 days to repay a loan if you separate from your 401(k) plan, whether the separation was voluntary or involuntary. The Tax, Reconciliation, and Jobs Act passed in 2017 gives you until your taxes are due for the year that you took the rollover (including extensions). For most, the latest you can file your taxes with an extension is October 15. The portion of the loan you don’t pay back into your 401(k) by then is subject to income tax, and if you’re under 59.5 it is also subject to a 10% penalty.
Using the example above, the individual would have to deposit $20,000 into an IRA prior to the tax filing deadline to avoid taxes and penalties. Let’s assume that the participant was 55 years old and in the 22% Federal Tax Bracket and 6% State Income Tax Bracket. If the loan balance was not paid in time, then the individual would be subject to $4,400 Federal Tax, $1,200 State Tax, and a $2,000 Federal Tax penalty for a total tax of $7,600. This is a large amount of taxes and fees to pay on a $20,000 balance so make sure to get those paid back before engaging in a rollover.
For those affected by COVID-19 and who meet the definition of a “qualified individual” under the CARES Act, you can treat a 2020 loan offset (non-repayment due to separation) as a coronavirus-rated distribution (CRD). Doing so would give you three years to repay the $20,000 loan and roll it over into your new IRA. In addition to that, the $20,000 loan would not be subject to the 10% early distribution penalty, and you could report this taxable income over three tax years instead of just one.
Are you under age 59 1/2?
If you are under the age of 59 1/2 you should cautiously consider doing a rollover. The current IRS 401(k) provisions allow for penalty-free distributions from 401(k)’s if you are separated from service between ages 55 and 59 1/2. If instead, the money is rolled into an IRA or new 401(k) then you lose the ability to avoid the 10% early distribution penalty on distributions. This would be a big mistake and could cost you a lot in taxes if you later discover that you require funds from the account to cover unforeseen expenses before age 59 ½.
At age 59 1/2 and beyond there is no longer an early distribution penalty. If you are considering a rollover between ages 55 and 59 1/2 and not using NUA, then we recommend leaving some money behind in the original 401(k). This would allow you to draw that money from that account if you ran into a scenario where you need to access the money before age 59 1/2.
Are you satisfied with the investment options in the Raytheon Savings Plan?
401(k) investment options can vary significantly depending on your company and the investment provider they hire. In the case of the Raytheon Technologies Savings Plan, they have a number of options to choose from. They offer Large Cap U.S. Equity, Small U.S. Equity, International Equity, Emerging Markets, Real Return, Age-Based, Target Date-Based, GIC/Stable Value, Bond, Moderate Allocation, and Raytheon Technologies Company Stock. If those options aren’t a fit, then they also offer a Self-Directed Brokerage Window, though additional fees may apply. Though this plan has a number of investment options, you may have the desire to move your funds elsewhere to have great control, lower costs, and greater investment selection.
To move your Raytheon Technologies Savings Plan, you’d first want to open an IRA account with a discount broker such as TD Ameritrade, Charles Schwab, or Fidelity. You would then request a rollover from your Raytheon Technologies Savings Plan. This IRA would give access to thousands of mutual funds and stocks to choose from. It would also allow you to purchase individual bonds. Depending on your investment objectives, this larger number of options may allow you to design a portfolio that is better suited for you.
Do you know the fees you are charged in your Raytheon Technology Savings Plan? The Raytheon Technology Savings Plan charges you investment fees and administrative fees. Though these fees are on the smaller side, you still should be aware of what you’re being charged. To understand these fees you should review the Raytheon Savings Plan Participant Fee Disclosure. In that document, you will be able to find the cost for each investment as well as any administrative fees. The SEC has a great investor bulletin on how fees and expenses affect your investment portfolio.
We suggest that you select as many low-cost investment options as possible. Many of the lowest-cost investment funds are index-based funds. These funds are constructed with the goal of tracking (or replicating) the market rather than outperforming the stock, bond, or real estate market. There are studies that show index funds tend to outperform high-fee actively managed funds over the long term making them a great option for your retirement plans. Therefore, creating a portfolio of low-cost funds can improve your chances of meeting your retirement goals.
Keep these steps in mind if you are considering rolling over your Raytheon Savings Plan. If you are in need of getting advice on your Raytheon Savings Plan, the best option is to work with a fee-only financial planner such as myself. This will ensure you’re working with a fiduciary who will put your interests ahead of their own.
