To Roll or Not to Roll

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Good question. Whether or not you should roll-over your retirement funds to an IRA..... it depends (#1 in the consultant’s handbook of responses).

Let’s face it: your rollover check may be the biggest one you receive in your entire life – and it comes with a lot of decisions that can have far-reaching consequences, maybe even irrevocable!

Basically, you have four options:

  • Stay put.  Leave it in the company plan, if allowed and for as long as allowed, or roll it over to a new employer’s plan if you’re changing jobs.
  • Roll the money over to an IRA
  • Convert to a Roth IRA or Roth 401(k)
  • Take a lump-sum distribution and pay the tax now.

Your choice will depend on when you’ll need the money, your retirement tax bracket, the size of your distribution, your age, health, life expectancy, your tax bracket, your plans for work, your income needs, whether creditor protection is important, and how it fits with your estate plan, just to name a few issues you’ll need to address.

To Roll:  Advantages of Rolling to an IRA

  • Flexibility re withholding.  Usually plans are required to withhold 20% of an eligible rollover distribution paid to an employee.  This doesn’t apply to IRAs.  Owners can choose their withholding percentage, even if it’s zero.
  • RMDs are simpler.  IRA balances are aggregated for RMD calculation and the distribution can come from  one or any combination of IRAs
  • More investment choices.  You’re no longer restricted to one ‘department store’.  Now you have the entire mall to shop in – the whole universe of investments, plus the ability to customize.  This can be important when planning in a volatile environment.
  • Roth conversions possible.  You can convert company plan funds directly to a Roth IRA, or leave the door open for future eligibility for converting from a traditional IRA to a Roth IRA later.  One caveat: some company plans may not allow a distribution that you can convert to a Roth IRA; but, using an IRA rollover, you can convert to a Roth IRA at any time.
  • Estate planning is easier.  Coordination between your IRA and estate plan is easier than coordinating an estate plan with a company plan, like a 401(k).
  • Withdrawal flexibility.  IRAs have no withdrawal restrictions, which may not be the case with company plans.  Some plans may not allow a distribution, even for personal hardship, if you’re under age 59-1/2.
  • Less paper and greater portability.  You can consolidate IRAs into one account and simplify paperwork.  If you plan to keep working, you can roll the taxable money in your IRA back into your new company’s plan if you wish.
  • Professional advice from a credentialed advisor well-versed in distribution issues and financial planning.  Management of company plans, such as 401(k)s it typically outsourced to clerical staff.

Not to Roll:  Advantages of Staying In Your Company Pan

  • Creditor protection.  Federal protection against personal bankruptcy, law suits, malpractice, and other actions.  Note this is protection on the federal level; IRAs receive creditor protection on the state level.  Also, under Federal Bankruptcy Law virtually all IRA funds are creditor protected from bankruptcy, but not other civil judgments.
  • Borrowing ability.  Many company plans have loan provisions. You can’t borrow from your IRA.
  • Still working – you can delay the mandatory age 72 deadline for required minimum distributions (RMDs).  You can’t do that with an IRA.

There are other advantages and disadvantages; but, these are the key issues that could affect most people.  Each individual’s situation is different and a reputable advisor can provide valuable assistance.

Hope you found this helpful.

Jim

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Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-based registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Jim's picture
Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-based registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.

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