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 an individual is looking for new employment, they might want to leave the money in the company plan so they can roll it over to a new employer’s plan once they find a new job. Once funds are rolled to a new employer’s plan, a client can delay age 72 required distributions from that company plan if they 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 you were at least 55 years old when you left your job and need to withdraw retirement funds immediately, you should leave the money in their company plan and take withdrawals from there. Distributions from a company plan will be subject to tax but no 10% penalty.
If you roll your 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. <INCLUDE LINK TO EXCEPTIONS>
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For state and local public safety employees, funds can be withdrawn penalty free if the separation from service was in the year the employee turned age 50 or older.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.
Plan Life Insurance
Individuals cannot buy life insurance in IRAs, but money in company plans can be invested in life insurance. Life insurance offered through a company plan may be the only life insurance an individual can qualify for or pay for. It may be costly to continue the insurance if they leave the plan.
However, upon retirement, the plan life insurance may have to be either distributed to the employee (a taxable event) or purchased by the employee. An employee could also surrender the policy with the cash going into the 401(k) (where it could be later rolled over to an IRA).
It’s also possible that if the employee moves to a new company, there may be an opportunity to purchase life insurance with the new plan assets.