The Upside and Downside of Employer Retirement Plan Rollovers
Written by Barry G. Armstrong, Armstrong Advisory Group
Whether you are changing jobs, retiring or still working, you may have different options available to you when deciding what to do with your current or former employer’s retirement plan. Should you rollover the balance to a Traditional IRA? Convert it to a Roth IRA? Roll it into your new employer’s retirement plan? Take a lump sum distribution? All of these decisions can have an impact on your financial future. Carefully weigh your options before making a move.
Are you still working at your employer but older than 59½? You may be in a position to take advantage to an option not available to all. Some employers will allow you to perform an in-service rollover. An in-service rollover allows you to transfer your balance from your employer sponsored plan (this includes 401(k) plans, 403b plans, 457 plans and pension plans) into an IRA, while you are still working and contributing to the plan.
- Your plan must allow for it in the plan documents. Check with your plan administrator to see if this is an option for you. Not all employers allow for in-service rollovers.
- You must to be 59½. There are no exceptions to this rule.
- Be sure you are requesting an in-service direct rollover. This means that the check is made payable to the custodian of your traditional IRA and not payable to you. When an employer issues a rollover check payable to you, an in-direct rollover, they are required to withhold 20% in Federal taxes on all pre-tax contributions. You’ll have to make up for the 20% withheld for taxes if you wanted to rollover your entire balance. This hassle and expense is avoided by requesting a direct rollover.
- You are in control. Let’s face it. Your employer decides where your employer plan is held, what investment options are available and the rules surrounding the plan operations. When you transfer your plan balance to an individual retirement account, you decide where you keep the money, including whether you invest it directly with a mutual fund company or if you invest it with an advisor or in a self-directed brokerage account.
- Diversification. When you are investing in your employer plan, they have determined which fund options are available to you. By rolling over your employer plan balance, you decide how you want to invest. You are able to diversify your portfolio with various different types of investment classes. You get to decide what investments are best for you, rather than being limited to what your employer has decided is best for the plan.
- You decide how you want to pay your taxes. When you are ready to start making withdrawals from your retirement accounts, withdrawals made directly from an employer plan are subject to a 20% federal income tax withholding, in addition to potential state income taxes. This is not optional for your employer. When you make withdrawals from a Traditional IRA, you can decide how much, if anything, you want withheld for taxes. Perhaps you have additional resources available to you and you would rather pay your taxes from a savings account. With an IRA, you have this option. With and employer plan, you don’t.
- Continue contributions
- Company stock – NUA
- Age 55 distributions from ER plan – no 10% penalty
- No loans in an IRA
Do you have small balance plans scattered all around? Have you gone from job to job, leaving your old employer plan in the dust? If you are the type of person that doesn’t check on your investments while you are working, what makes you think you will check on them once you’ve left? In this dynamic investment environment, it seems more important than ever that you keep an eye on your investments.