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About this Episode
Most retirement savers know their 401(k) is their biggest account. What many don’t realize is just how many rules, fees, and strategies surround these plans, and how costly missteps can be.
On this episode of GDS Unplugged, adviser Tim Allin, CFP®, CEPA®, shared insights on everything from early withdrawal provisions to the much-talked-about “Mega Backdoor Roth.” Below are the highlights.
The Hidden Costs of a 401(k)
It’s common for participants to assume their workplace plan is “free.” In reality, most plans come with layers of:
- Investment expenses (fund expense ratios),
- Administrative fees, and
- Service charges for plan management.
Fees aren’t necessarily negative, but if you’re paying them, you should be receiving value in return, whether that’s financial planning, tax coordination, or investment guidance. Without that, fees can eat into long-term returns without providing real benefits.
Required Minimum Distributions: Avoiding Penalties
Starting at age 73 (age 75 for those born in 1960 or later), the IRS requires savers to begin taking Required Minimum Distributions (RMDs) from tax-deferred accounts.
Key facts:
- Missing an RMD can result in a penalty of 25% of the required amount (reduced to 10% if corrected quickly).
- IRAs can be aggregated; you may take the combined RMD from any single IRA.
- 401(k)s must be drawn individually. If you have multiple older plans, you must take separate distributions from each one.
This is one reason consolidating accounts before RMD age can reduce both stress and paperwork.
Retiring Early? Strategies for Accessing Funds
Leaving the workforce before 59½ doesn’t mean funds are locked away forever. Two IRS provisions offer potential options:
- Rule of 55: If you separate from service in or after the year you turn 55 (50 for certain public-safety workers), you may access that employer’s 401(k)/403(b) without the 10% early withdrawal penalty.
- Rule 72(t): Allows penalty-free withdrawals from IRAs and some other accounts at any age, but requires a rigid schedule of withdrawals for at least five years or until 59½, whichever is longer. Breaking the schedule can result in retroactive penalties.
Both options require careful planning, and in some cases, consultation with a CPA or financial professional.
Target-Date Funds: Convenient, but Not Custom
Target-date funds (TDFs) are designed to automatically adjust from stocks to bonds as a “target” retirement year approaches. While simple, they come with drawbacks:
- Limited customization: Everyone with the same retirement year gets the same allocation, regardless of risk tolerance.
- Relatively high costs: Expense ratios may run higher than index alternatives.
- Market timing risks: Rebalancing may force sales at inopportune times.
TDFs can work well as a default choice, but they are not one-size-fits-all.
The Mega Backdoor Roth: Maximizing Contribution Options
Some employer-sponsored plans allow an advanced strategy known as the Mega Backdoor Roth. Here’s how it works:
- For 2025, employees may defer up to $23,500 (plus catch-up contributions for those 50+).
- With employer matches, total contributions may reach around $40,000.
- The IRS “annual additions limit” allows even more, often up to $70,000 in combined contributions.
- Certain plans permit participants to make after-tax contributions above the standard deferral, then convert those dollars into Roth.
When available, this strategy may provide an opportunity to expand the amount of retirement money that grows tax-free. However, rules vary by employer, so checking plan documents or calling the provider is essential.
Business Owners: Why Exit Planning Needs a Team
For business owners, selling a company is often a once-in-a-lifetime event. Yet some research shows that 70–80% of businesses that go to market never sell, and among those that do, most owners report regret within a year, according to the Exit Planning Institute.
The difference often comes down to planning. Successful exits typically involve a core team: attorney, CPA, wealth manager, and in some cases family or business partners. Just like surgery requires coordination among specialists, business sales benefit from a “quarterback” ensuring communication, accountability, and follow-through.
Key Takeaway
The common thread across all these strategies, from RMDs and early withdrawals to Roth conversions and exit planning, is the need for preparation. Most mistakes occur not because people lack the intelligence to choose well, but because they never had the right information or a clear plan.
With proper planning, clients may reduce the likelihood of penalties, better manage fees and align strategies with their long-term goals.
Resources:
- Ready to take your learning to the next step?
- Connect with Glen Smith and Robert Casey on LinkedIn.
- Check out our blog on saving for retirement.
- Subscribe to our YouTube channel.
- Contact GDS Wealth Management for a complimentary financial consultation.
Why Listen?
This episode is filled with practical insights that can help you uncover the often-overlooked costs, rules, and opportunities within your 401(k).
From hidden fees and Required Minimum Distributions to early withdrawal strategies, target-date fund pitfalls, and advanced approaches like the Mega Backdoor Roth, adviser Tim Allin and Glen Smith cover it all.
Tune in to explore ways to better understand retirement strategies, avoid common pitfalls, and align your plan with your long-term goals. Don’t miss this opportunity to learn more about taking steps to better understand and prepare for your financial future.
GDS Wealth Management (“GDS”) is an SEC-registered investment adviser. Registration does not imply a certain level of skill or training. Glen Smith and Tim Allin are investment adviser representatives of GDS Wealth Management. This content is provided for informational and educational purposes only and should not be construed as investment, legal, or tax advice, nor as a recommendation to buy or sell any security. The strategies and examples discussed, including retirement distributions, 401(k) planning, Roth conversions, Social Security strategies, charitable giving, and business exit planning, are general in nature and may not be suitable for all individuals. Any references to tax treatment or potential benefits are based on current laws and regulations, which are subject to change. GDS does not provide tax or legal services. Individuals should consult with their own qualified tax advisor, attorney, and/or financial professional regarding their personal circumstances. All investments involve risk, including the possible loss of principal. Past performance is not indicative of future results. Advisory services are provided only where GDS and its representatives are properly licensed or exempt. References to independent custodians are provided as examples only and should not be construed as endorsements of any specific provider. Complimentary consultations are for informational purposes only and do not guarantee any specific outcome. For additional information about our services, fees, and disclosures, please visit http://www.gdswealth.com.
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