Employer retirement plans such as 401(k)s, 403(b)s,and profit-sharing plans can all be rolled over into IRAs. Employer retirement plan rollovers are an easy way to increase personal control over retirement assets, while benefiting your heir’s at the same time, even benefitting favorite charities if you are so inclined.
No restriction or override of beneficiary designation: The unrestricted ability to name anyone as a beneficiary is often reason enough to roll over your qualified plan assets into an individual IRA. IRA beneficiaries can include spouse, children, grandchildren, sisters, brothers, nieces and nephews, churches, synagogues, and other religious organizations and friends.
Unlimited investment options: Unlike employer plans that may offer only a handful of mutual fund choices, and sometimes, company’s stock, IRAs offer an almost unlimited array of investment options from individual stocks, bonds, fixed or variable annuities, mutual funds, real estate trusts, gold, metals, oil and energy allowing tremendous flexibility.
Availability for withdrawals: Though subject to penalties unless certain exceptions apply (death, disability, medical expenses, etc.), money can be withdrawn from an IRA at any time, and for any reason. Distributions prior to age 59 and one-half will be subject to a 10 percent early withdrawal penalty, but knowing that the funds are available for withdrawal in an emergency situation can be a great comfort.
Access for college funding (free from federal tax penalty): One of the exceptions to the 10 percent early withdrawal penalty mentioned above is for withdrawal of IRA funds to pay certain college expenses. This exception is available only for IRA distributions, and not for employer-sponsored plan distributions. It permits an IRA owner to withdraw qualifying amounts from his or her IRA to cover costs of higher education incurred by the account owner, his spouse, or the children or grandchildren of the owner or his spouse. The ability to access the IRA account balance to pay for college expenses may provide an alternative or supplement to financial aid.
Tax penalty-free access for first time homebuyers: Another exception to the 10 percent early withdrawal penalty available to IRA owners but not to qualified plan participants is the ability to withdraw funds to cover qualified acquisition costs for the purchase of a principal residence of a first-time homebuyer. This exception has limits in total withdrawals during the lifetime of the IRA owner, but the distribution can be used for the IRA owner, spouse, or any descendants or ancestors of the IRA owner or his or her spouse.
Ease and timeliness of access: Even after retirement or death has occurred, accessing funds in a qualified retirement account can be a time-consuming procedure, taking up to several months, or longer, depending on the employer plan. Many small employer plans only process distribution requests on a quarterly or semi-annual basis. If those funds are needed to provide income, cover expenses or pay estate taxes after the participant’s death, the effects on the family can be devastating. IRAs, on the other hand, can generally issue checks within a day or two of receiving a request for a distribution. This timely access to IRA funds can have a huge effect during trying events, death, and emergencies.
Stretch or inherited IRA: What happens if an IRA owner doesn’t have a spouse, and names his/her children as beneficiaries of his qualified plan? Although the Internal Revenue Code and the IRS Regulations allow the children to take distributions based on their life expectancy, a qualified plan is usually less flexible. Most employer-sponsored plans will require non-spouse beneficiaries to distribute the entire account balance as a lump sum distribution, or may allow distributions for up to five years after death. This limits the tax-deferred growth available on that account balance and forces the beneficiaries to incur income tax liabilities upfront usually not the intent of the account owner.
Roth conversion option: Many of our clients with IRAs who have no need for the income, may benefit by converting to Roth’s because, unlike traditional IRA’s which require distributions and income taxes paid every year, the Roth allows the owner to leave the assets in the Roth for life, without requiring any mandatory distribution.
Of course, there are many things to be cautious about in rolling an employer plan to an IRA or converting an IRA to a Roth. Most importantly, everyone’s situation is different, and not all retirement plans are created equal. As such, the information in this article is presented with the intent of being general in nature. Before making any decisions about your retirement, you should speak with a qualified financial advisor and tax specialist.