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Reasons to Roll Over Your 401(k) to an IRA

 

Consolidation and Control

The IRA is a good place to consolidate all retirement funds. It can help account holders stay in control by not having to keep track of several company plans and IRAs and the beneficiary and withdrawal options on each plan. You don’t have to worry about required distributions from both the company plan and the IRA once all the funds have been rolled to an IRA.

 

Investment Options

401(k)s typically offer between 20 & 40 funds. The federal government’s Thrift Savings Plan only offers 5 funds.

With an IRA, you have thousands of investment options and/or money managers to choose from. You are not limited by a small number of investments typically offered by the company plan and you can customize investment choices to meet your personal needs. This is important in these volatile times.

 

Distributions

Taking a distribution from an IRA is typically much faster than requesting a distribution or rollover from your 401(k).

IRAs require a simple distribution form. 401(k)s, however, require the participant to fill out and submit a distribution form that may require a notary and the plan administrator must sign off on the form. These extra steps take more time and can be frustrating if the plan provider is not responsive.

 

IRAs Have No Withdrawal Restrictions

Company plans may have restrictions on withdrawals. In an IRA, account holders generally have immediate access to funds, regardless of age. Even if you are under the age 59½, you can withdraw from your IRA. You will pay tax and the 10% penalty, if applicable, but would still have the ability to withdraw quickly. The company plan may have restrictions on withdrawals before age 59½. If you are no longer working for the company and leave the money in the company plan, it still may take some time to access your cash. If you need it right away, that will put unnecessary pressure on you at a time when the last thing you need is more problems.

 

More flexible withholding options

Plans are generally required to withhold 20% of an eligible rollover distribution paid to an employee. IRAs have no such 20% mandatory withholding rule. IRA owners can opt out of withholding, elect to have 10% withheld, or have an even larger amount withheld if they wish.

 

SECURE Act may require planning changes

New tax rules mean a learning curve for both the plan administrator and financial advisors. Plan administrators tend to be more transaction oriented and don’t give tax advice. Competent financial advisors may be more up to speed with tax law changes and may be able to react and update plans more efficiently.

 

RMD Simplicity

IRAs are aggregated for calculating RMDs. An IRA owner can take their RMD from any one or a combination of their own IRAs. With company plans, the employee generally has to take their RMD from each plan separately. Exception: 403(b) plans – RMDs can be taken from any one of a person’s 403(b) plans.

Article – RMDs When You Have More Than One Retirement Account

 

Potential Inherited 401k Nightmares

When a 401(k) participant dies, their beneficiaries will receive the proceeds. Beneficiaries of IRAs and 401(k)s must abide by the 10-Year Rule where they must withdraw 100% of the inherited 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.

 

Plans Must Allow a Post-Death Transfer to Non-Spouse Beneficiaries

Under the Pension Protection Act of 2006, non-spouse plan beneficiaries can transfer the company plan balance by trustee-to-trustee transfer to a properly titled inherited IRA and take distributions over 10 years, or if an eligible designated beneficiary, stretch distributions from the IRA, just the same as if the non-spouse beneficiary inherited from an IRA.

Even though beneficiaries can transfer an inherited plan to an inherited IRA (or convert the inherited plan to an inherited Roth IRA), the IRA rollover is still a better option because beneficiaries do not have to deal with the company plan and mistakes that could happen there. Beneficiaries have better control with an inherited IRA.

 

QCDs – Qualified Charitable Distributions

Qualified Charitable Distributions can only be made from IRAs. This tax benefit is not available if the funds remain in the company plan.

Here is an article with more details on QCDs.

 

Estate Planning

The IRA can more easily be coordinated with an overall estate plan than the company plan assets. IRAs offer the option of splitting accounts and naming several primary and contingent beneficiaries, if the IRA custodian allows. An IRA account holder can name anyone they wish as their IRA beneficiary. Funds in a company retirement plan are subject to federal law that, for the most part, requires participants to name their spouse as beneficiary unless the spouse signs a waiver. The IRA rollover makes the estate plan more flexible. The waiver must still be filed with the plan before the funds can be rolled over to an IRA.

 

Bottom line case for an IRA Rollover:

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.

Ask us about our complementary portfolio analysis and stress test.