Reasons to Leave Assets in the Company Plan
Federal Creditor Protection
Generally, company plan assets receive federal creditor protection. State law protects IRAs. If a state offers limited or no creditor protection, and there are malpractice, divorce, or creditor problems or other types of lawsuits, creditor protection should be considered. On April 20, 2005, the bankruptcy law (BAPCPA) created federal creditor protection for IRAs in bankruptcy situations only; not for other types of judgments.
Delaying RMDs with the “Still Working” exception
Will Client Be Working Again?
If you are looking for new employment, you may want to leave your money in the company plan so you can roll it over to a new employer’s plan once you find a new job. Once funds are rolled to a new employer’s plan, you can delay age 72 required distributions from that company plan if you are still working for that company. The “still working” exception is not a mandatory plan provision. It also does not apply to IRAs. The new portability rules minimize this consideration because as of 2002 individuals can roll any pre-tax IRA funds to a company plan and delay required distributions on those funds.
Age 55 Plan Exception to the 10% Penalty
If a plan participant was at least 55 years old when he left his job and needs to withdraw retirement funds immediately, he should leave the money in his company plan and take his withdrawals from there. Distributions from a company plan will be subject to tax but no 10% penalty. If the participant rolls his plan funds to an IRA, withdrawals before age 59½ will be subject to the 10% early withdrawal penalty unless one of the other exceptions applies. The age 55 exception does not apply to IRA distributions.
Age 50 for Public Safety Employees
For state and local public safety employees, funds can be withdrawn penalty free if the separation from service was in the year the employee turned age 50 or older. (Pension Protection Act of 2006).
The Trade Priorities and Accountability Act of 2015 expanded both the definition of plans and the definition of public safety employees. The PATH Act of 2015 (Protecting Americans from Tax Hikes) further expanded the list of qualifying public safety employees.
As of January 1, 2016, the age 50 exception will apply to both defined contribution and defined benefit plans for public safety employees. This group of employees will now include federal public safety workers, including law enforcement officers, firefighters, certain customs officials, border protection officers and air traffic controllers and from the PATH Act, nuclear materials couriers, U.S. Capitol Police, Supreme Court Police, and diplomatic security special agents of the Department of State.
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