To Roll or Not to Roll Over Workplace Retirement Assets to an IRA

As the country experiences the highest unemployment rate in US history due to COVID-19, it now becomes more critical to understand if funds from an employer plan should be rolled over to an IRA. 

Reasons to leave the money in a workplace plan may include federal creditor protection under ERISA (Employee Retirement Income Security Act of 1974).  IRAs only offer state law protection from bankruptcy. 

Another consideration for leaving money in a plan is if you are still working.  The still-working exception allows one to delay RMDs from a company plan until after he or she officially retires or separates from the company service.  Moreover, if you are a plan participant and you leave your job at the age of 55, you can take withdrawals from your employer plan without a 10% penalty (though the distribution will be subject to tax).  There is also an age 50 withdrawal exception for federal, state and local public safety employees such as law enforcement officers, firefighters and emergency medical service workers, to name a few. 

Tax break considerations during a rollover include net unrealized appreciation (NUA).  If a work plan includes highly appreciated company stock, that stock could be withdrawn while the rest of the plan assets could be rolled over to an IRA. If processed properly, the only initial tax owed would be ordinary income tax on the cost basis of the stock when it was acquired within the plan — not the current market value on the day of distribution.

Another tax break that could be missed when doing a rollover is Roth conversions.  If you have after-tax funds in your employer plan, converting those dollars to a Roth IRA would come with a no tax bill.

On the other hand, there are benefits to rolling money over to an IRA versus leaving it in an employer plan:

  • Flexibility in Estate Planning.  When considering whether roll over or not, it should be noted that IRAs offer the option of splitting accounts while the owner is still living and naming several primary and contingent beneficiaries.  Company retirement plans, on the other hand, are subject to a federal law requirement to name spouses as beneficiaries unless the spouse signs a waiver.
  • More Investment Options.  Compared to a company plan that gives only a limited number of investments, IRAs offer more investment options to choose from.
  • Ability to consolidate funds.  Old work plans that are rolled over into an IRA would allow you to consolidate your retirement funds.  Not only can you minimize paperwork and streamline withdrawal options, you can also aggregate RMDs among IRAs.
  • No withdrawal restrictions.  There are strict rules for when you can withdraw from your work plan account and what funds may be available even in times of an emergency or hardship.  On the other hand, IRAs carry no such restrictions.  You can have full access to your IRA account though penalties apply if you’re under the age of 59 ½.
  • Ability to do QCDs.  Qualified Charitable Distributions or QCDs are only available from IRAs.  If you are charitably inclined, your money in a work plan would have to be rolled over to an IRA first in order to give to qualified charities.

If in doubt and faced with this important decision on whether to roll money into an IRA or leave it in an employer plan, contact us and we can help with the options available to you and what considerations should be kept in mind.

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