Rollover Decisions

If you are considering a rollover from an employer-sponsored retirement plan, please read the following very carefully before you decide.

In general, and excluding plan distributions, you have three options that maintain tax deferral:

  1. Keep the assets in the current retirement plan
  2. Roll over the assets to another employer’s plan
  3. Roll over the assets to an IRA

When weighing the pros and cons of rolling over assets into an IRA, you should consider a variety of factors, including but not limited to:

  • Fees and expenses
  • Level of services available
  • Available investment options
  • Ability to take penalty-free withdrawals
  • Application of required minimum distributions
  • Protections from creditors and legal judgments
  • Holdings of employer stock
  • Any special features of the existing account

IRAs and employer plans each have specific advantages over the other.

Advantages of an IRA

  • You can aggregate required minimum distributions. In other words, RMDs can be satisfied from any one IRA or a combination of IRAs (this rule excludes inherited IRAs, however).
  • IRAs allow for better tax-bracket management, as withholding on distributions is generally optional on IRAs, while employer plans can require 20% withholding.
  • IRAs have flexible distribution options, easier administration, and permit Qualified Charitable Distributions.
  • Estate Planning: It is easy to create multiple IRAs on which to appoint a different mix of beneficiaries.
  • Investing: A wider range of investment options and custodians/trading platforms are available with IRAs.
  • Conversions: Roth conversions are allowed at any time from an IRA, but plan funds must be eligible for roll over to convert.
  • Account Consolidation: All retirement funds can be under one umbrella, which can allow for simpler account management and administration.
  • Portability: You can roll back to the company plan.
  • The 10% early distribution penalty can be waived on qualified distributions for higher education, first-time home buyers, or health insurance (if unemployed).

Advantages of Staying Put or Rolling to a New Employer’s Plan

  • Federal creditor protection: Plan assets are protected from bankruptcy and other judgments. Assets rolled into an IRA that can be traced to employer plans have federal bankruptcy protection, but have limited protection against other judgments, lawsuits, or claims. Your resident state sets the non-bankruptcy protection limits.
  • You may borrow from your employer’s plan and life insurance may be held in the plan. IRAs do not allow for either.
  • Generally, RMDs can be delayed until retirement.
  • If you are 55 or older (50 or older for public safety employees) and have separated from service, plan distributions are not subject to the 10% early withdrawal penalty. This benefit is delayed until age 59.5 if the assets are rolled into an IRA.
  • 457(b) deferred compensation plans are exempt from the 10% penalty. This benefit is lost if the assets are rolled into an IRA.
  • Divorce distributions (qualified domestic relations order (QDRO)) are penalty free. This benefit does not apply to IRAs.
  • The net unrealized appreciation (NUA) rules apply to company stock within the plan. Company stock liquidated and rolled over forfeit access to the tax advantaged NUA rules.

The rollover decision is unique to your situation. As fiduciaries, we will help you weigh the pros and cons so that you can decide what is prudent given your current situation.

For more information about what to consider prior to consolidating assets, please review the resources below.

401(k) Rollovers
Rollover Guidance