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Rollovers from Employer Retirement Savings Plans: Factors to Consider

Rollovers from Employer Retirement Savings Plans: Factors to Consider

There are many factors to consider when deciding whether to roll over a distribution from a 401(k), 403(b), or governmental 457(b) plan1, and where your rollover dollars should go if you decide to make a rollover. Always (1) ask about possible surrender charges that may be imposed by your existing employer plan, or new surrender charges that your IRA or new plan may impose, (2) compare investment fees and expenses charged by your IRA or new plan (and investment funds) with those charged by your existing employer plan (if any), and (3) understand any features, rights, and guarantees you may be giving up, or gaining, by moving your funds to an IRA or new employer plan.

 

Roll funds over to an IRA

Leave funds in original employer plan or roll over to new employer plan

Investment options

  • Often provides broader range of investment options
  • Can diversify investments with an unlimited number of IRAs2
  • Menu of investment options typically limited (usually mutual funds)3
  • There may be certain investment opportunities in plan that cannot be replicated in IRA
  • You may be satisfied by low-cost institutional funds available in your particular plan, and therefore not regard IRA's broader array of investments as an important factor

Fees and expenses

  • Investment-related expenses may include sales loads, commissions, expenses of any mutual fund investments, investment advisory fees
  • Account fees may include administrative, account setup, and custodial fees
  • Investment-related expenses may include sales loads, commissions, expenses of any mutual fund investments, investment advisory fees
  • Plan fees may include plan administrative fees (recordkeeping, compliance, trustee fees); fees for services such as loans
  • Employers may pay some or all of plan's administrative expenses

Ability to change trustees/custodians

  • Can freely move your IRA dollars among different IRA trustees/custodians
  • Flexibility to change trustees/custodians as often as you want if dissatisfied with investment performance or customer service (no limit on how many direct, trustee-to-trustee IRA transfers you can do in a year)4
  • Cannot move funds to different trustee/custodian until you receive an eligible rollover distribution from the plan

Distribution flexibility

  • Almost unlimited distribution flexibility for you and your beneficiaries
  • Distribution options available to you and your beneficiaries typically limited

Annuity option

  • Individual Retirement Annuities generally available from insurance companies
  • Employer plans may, but don't have to, provide annuity option
  • May have less expensive group annuities

Required minimum distributions: Roth

  • No required distributions during your lifetime (beneficiaries must take distributions after your death)
  • Required at age 72 or actual retirement, if later (unless 5% owner rule applies)
  • Can avoid RMDs by rolling Roth funds to a Roth IRA

Required minimum distributions: Non-Roth

  • Required after reaching age 72
  • Can postpone RMDs from current employer's plan past age 72 to actual retirement unless 5% owner rule applies; may be advantageous if you plan to work into your 70s

Loans

  • Loans not available
  • Employer plans may, but don't have to, allow loans

Creditor protection

  • Amounts rolled over to IRA from employer plan generally protected in full under federal law in event of bankruptcy
  • Creditor protection outside of bankruptcy generally depends on state law
  • Inherited IRAs are not protected from creditors
  • Generally unlimited protection from creditors, both inside and outside of bankruptcy5

10% early distribution penalty (does not apply to rollovers or Roth conversions)

  • Penalty generally applies to distributions before age 59½ (unless exception applies)
  • IRAs (but not employer plans) offer exception for qualified first-time homebuyers ($10,000 lifetime cap), qualified higher-education expenses, and payment of health insurance premiums during period of unemployment
  • Penalty generally applies to distributions before age 59½ (unless exception applies)
  • Penalty does not apply if you receive distribution as a result of separation from service in year you reach age 55 or later (age 50 for qualified public safety employees)

Other services

  • IRA providers offer different levels of service, which may include full brokerage service, investment advice, distribution planning, and access to securities execution online
  • Employer plans may provide access to investment advice, planning tools, telephone help lines, educational materials, and workshops

Rollover of after-tax dollars

  • After-tax (nontaxable) dollars rolled over to IRA may not be rolled back into employer plan, only to other IRAs
  • After-tax (nontaxable) dollars can be rolled over to other employer plans or IRAs

Conversion of pre-tax and after-tax dollars to Roth

  • Can convert all or part of traditional IRA to Roth IRA at any time
  • Plan may, but doesn't have to, allow in-plan Roth conversions
  • Can roll over (i.e., convert) non-Roth funds to a Roth IRA

Five-year holding period for tax-free qualified Roth distributions

  • Starts first day of year you first contribute to any Roth IRA (including conversion)
  • Nonqualified Roth funds rolled over from employer plan must satisfy Roth IRA's 5-year holding period
  • Starts first day of plan year you make Roth contributions to that particular plan
  • If Roth funds are rolled over to new employer's plan, 5-year holding period carries over and applies to all funds in new plan; may enable earlier tax-free qualified distributions from new plan

Employer stock

  • Appreciation in employer stock transferred in-kind to IRA taxed as ordinary income when distributed from IRA
  • Appreciated employer stock may be eligible for favorable long-term capital gains tax treatment when distributed from the plan and later sold (net unrealized appreciation, or NUA rules)
  • For some participants, risk of holding too much employer stock may make it advisable to liquidate holdings and roll over proceeds to IRA even if it means losing favorable tax treatment

1This table considers the options for eligible rollover distributions. You cannot roll over hardship withdrawals, required minimum distributions, substantially equal periodic payments, corrective distributions, and certain other payments. Special rules may apply if you are the beneficiary of a plan participant.

2Diversification alone cannot guarantee a profit or ensure against the possibility of loss. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any strategy will be successful.

3Before investing in a mutual fund, carefully consider the investment objectives, risks, charges, and expenses of the fund. This information can be found in the prospectus, which can be obtained from the fund. Read it carefully before investing.

4You can make only one indirect (60-day) rollover from one IRA to another IRA in any 12-month period, regardless of how many IRAs (including traditional, Roth, SEP, and SIMPLE IRAs) you own. There are no limits to the number of trustee-to-trustee (direct) transfers you can make.

5Federal protection from creditors outside bankruptcy applies to plans covered by the "anti-assignment" provisions of the Employee Retirement Income Security Act of 1974 (ERISA). Individual (solo) 401(k) plans, governmental plans, SEP and SIMPLE IRA plans, and certain church plans are generally not covered by these ERISA provisions.

All information herein has been prepared solely for informational purposes only and opinions are subject to change. Past performance is not indicative of future results and all investments involve the risk of loss of principal. For information on how these general principles apply to your situation, consult an investment professional.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2020

Article Topic Specialist: Keith Kuzera, AIF®

Keith is a Wealth Manager with SVA Wealth Management, LLC.

With more than nine years in the financial industry, Keith provides comprehensive financial planning to his clients as well as asset management, investment analysis, and social security planning. He also conducts educational meetings for participants in qualified retirement plans.

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