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Options for Rolling Over Your Employer Retirement Plan

Options for Rolling Over Your Employer Retirement Plan

June 06, 2021
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Options for Rolling Over Your Employer Retirement Plan 


If you have experienced a change of employment, been offered a pension buy-out, retired, or are planning to retire you may have the opportunity to make next step decisions about the assets being held in your former ( or soon to be former) employer's retirement plan. There is a wider variety of options available, and you want to make sure to have all the information necessary to make a decision that meets your needs best. Choosing a plan will depend on your employer plan documents, specific needs and goals your have, and guidance from your tax professional. Let's take a little time to discuss each of your options and what they mean for you. 


Leave assets in your former employer's plan

Depending on your balance and if it meets current governmental limits and employer plan provisions, you may be able to leave the assets in the current plan. This means your former employer retains the responsibility for selecting investments available to you and the plan documents and provisions set forth by those documents controls distribution options and beneficiary options. 

        There are several pros and cons to consider with this option

        Pros include: you are able to maintain tax-deferred growth potential in the plan, the plan may have lower fees than an individual held IRA, penalty free distributions may be              available prior to age 59 1/2, there is protection from creditors under federal law, the plan may allow you to borrow against your assets, and your accrued benefits may not be forfeited. These are all subject to the plan documents and rule. 

       Cons include: you may have limited investment options which may or may not meet your specific needs,  you may not be able to remain in the plan if your balance is less than $5,000, and you are subject to the distributions rules of the plan documents making it more difficult to access money in the event it is needed. 


Transfer the distribution directly to your new employer plan

If you are changing jobs, in some cases your new employer will allow you to transfer your previous employer plan directly into your new employer plan to take advantage of their investment options. This type of transfer allows you to avoid the mandatory 20% tax withholding and potential early withdrawal penalties on cash distributions, and you will defer income taxes on the assets until your make withdrawals from the new plan. Not all employer plans allow for this type of transfer so it will be important to check with your new employer plan. If you are retiring or not planning to go back to work, this options would not be available. 

There are several pros and cons to consider with this option

        Pros include: you are able to maintain tax-deferred growth potential in the plan, you may have the option to borrow from your assets if allowed under the plan, you would have protection from creditors under federal law, the fees of the plan may be less than an individually held IRA, and if you are still working at age 72, you may not be required to take required minimum distributions. These are all subject to the plan documents and rule. 

       Cons include: you may have limited investment options which may or may not meet your specific needs, and you may be subject to income tax and early IRS withdrawal penalties if funds are not rolled into the new plan in a timely manner. 


Directly transfer or rollover your distribution into an IRA

If you are looking to hold your funds in an individual IRA rather than keeping them in the current plan or transferring them into a new plan, directly transferring may be a good options for you. It allows your to avoid the 20% mandatory tax withholding and potential early withdrawal penalties. It is a non-taxable event and allowed your assets to be tax-deferred. The individually owned IRA allows you to defer income taxes on the distribution until your take withdrawals from the IRA. This options means your take a lump sum distribution from your former employer sponsored plan and deposit into your individual IRA. 

There are several pros and cons to consider with this option

        Pros include: you are able to maintain tax-deferred growth potential, you have the ability to select from a broader range of investment options to meet your personal needs and goals, you can obtain personalized investment advice, it allows you to consolidate your retirement assets, you have the ability to covert funds to a Roth IRA if it is appropriate and meets your needs, and you may receive a higher level of service that is personalized to you. 

       Cons include: any annuity income, life insurance benefits or other benefits offered by the employer sponsored plan may be forfeited, and IRA may not be protected in bankruptsy proceedings, annual fees and/or commissions may be higher, you may incur other fees like maintenance fees or custodial fees in the individual IRA depending on your investment choice, and there may be consequences of NET Unrealized Appreciation (NUA). 

Keep/spend the distribution from the qualified employer plan

If you choose to keep or spend your distribution, a 20% mandatory taxable portion will be withheld and wait to the IRA upon distribution. You are subject to federal and state income taxes on the taxable portion of the withdrawal and may incur a 10% penalty for early withdrawal. There are many other factors for taxation that may come into play and should be carefully considered with your tax professional. 

There are several pros and cons to consider with this option

       Pros include: Immediate availability of cash

       Cons include: any annuity income, life insurance benefits, or other benefits offered by the employer sponsored plan are forfeited and if you are under the age of 59 1/2, you are subject to a 10% IRA early withdrawal penalty, and is subject to federal and state income tax rules. 


It may be tempting to receive a distribution from your retirement plan, and what you choose to do with it can have a significant impact on your retirement savings. Before making your decision, you should talk with a financial advisor and your tax profession to understand the impact it may have for you. 


Resources: 

IRS Publications 575 and 590 – www.irs.gov/publications

IRS Notice 2009-68 Safe Harbor Explanation Eligible Rollover Distributions – https://www.irs.gov/irb/2009-39_IRB

FINRA Regulatory Notice 13-45 Rollovers to Individual Retirement Accounts – https://www.finra.org/rules-guidance/notices/13-45

FINRA Alert – The IRA Rollover: 10 Tips to Making a Sound Decision – https://www.finra.org/investors/alerts/ira-rollover-10-tips-making-sound-decision


Disclosure: 

This is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.
This information does not constitute tax or legal advice. Please contact your tax and legal advisor about your particular situation.

(06/21)