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.
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.
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.
For state and local public safety employees, funds can be withdrawn penalty free if the separation from service was in the year the employee turned age 50 or older.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.
When a 401(k) participant dies, their beneficiaries will receive the proceeds. Beneficiaries of IRAs, TSPs and 401(k)s must abide by the 10-Year Rule where they must withdraw 100% of the inherited TSP/401(k) within 10 years and pay tax on that money.
Company retirement plan administrators generally do not want to get involved in the administrative nightmare of keeping track of the beneficiaries of deceased ex-employees as they take required distributions. Instead, the plans simply pay out the beneficiary in one year or five years at best.
Even if the plan beneficiary is the spouse, the spouse can also be cashed out in five years. But a spouse can rollover the company plan money to their own IRA and name their own beneficiaries.
The best option to guarantee the most favorable payout after death for children or grandchildren is to roll the company plan funds over to an IRA as soon as possible after retirement. This way, beneficiaries never have to deal with the company plan and the company bureaucracy which may mess up the non-spouse transfer.
Plans may not be as easy to deal with administratively especially if beneficiary planning will change as a result of the SECURE Act. Here too it may be better to work with a personal financial advisor than to rely on the plan administrators to update your plans.
Individuals who are ex-employees virtually always receive better service and more personal attention from financial advisors than from an inexperienced phone rep at the firm where the company plan has been outsourced.
Once funds are in IRAs, planning updates can be done with the help of a personal financial advisor rather than relying on plan administrators who may not be able to properly advise on comprehensive planning options.
It is generally a good idea to consult with a personal financial advisor regarding rollover and investment decisions.