In my experience, retirees are often confused regarding whether or not to leave money in their former employer’s plan or roll it to an IRA. The answer, of course, is never a simple one, because there are several factors to consider based on your personal situation. Here is a list of a few considerations to help make that decision easier.
1. Investment choices
In an IRA, you have nearly unlimited choices in what you can invest the funds in, versus a limited menu in the company plan. This is often the #1 argument for rolling out the funds. Personally, I don’t want to leave money with a former employer. This is especially true when you don’t retire from that employer but simply change jobs. I want control of my money and don’t want it affected every time the company decides to change plan providers.
2. Beneficiary flexibility
This may be very important to individuals in second or third marriages. In a company plan, your spouse is your beneficiary unless they sign off agreeing to let you name another person, like children from a previous marriage. Be careful; even if a future spouse waived those rights in a prenuptial agreement, the day you get married, that part of the agreement no longer applies! Only a spouse can waive that right, and a fiancé signing a prenup is not a spouse when they sign it, therefore they never really gave up that right. If your plan is to leave the money to your kids, you might want to consider rolling it to an IRA first before you get married. In an IRA, you can name anyone as your beneficiary. Also, some company plans will not allow you to name a trust as a beneficiary of your plan. Yes, the plan, not your estate documents, controls this. If the plan document doesn’t allow for it, then you can’t do it!
3. Do you need the money?
If not, then money might be better left inside a company plan if you are still working. As long as you are an active employee in an active plan, you can take advantage of the still working exception to required minimum distributions (RMDs). Under the exception, the money in the plan does not have to be factored into the calculation for your RMD, meaning you are required to take out less money. There is no exception for IRAs.
4. College planning
If you intend to use some of your qualified funds to pay for college, not my favorite idea by the way, you are much better off with those funds coming out of your IRA than your company plan because the IRA allows for an exception to the 10% penalty, which applies when you take money out of a retirement plan before age 59 ½. Any money you take out will still be taxable as ordinary income, but just not subject to the 10% penalty like it would be from a plan.
5. Creditor Protection
Funds inside of an ERISA plan have more creditor protection than they do inside of an IRA. The IRA may provide protection in the case of a bankruptcy, but only up to certain limits and not necessarily beyond that.
6. 72t (the age 55 exception)
If you retire before age 59 ½, there is a way to take money out of your company plan without paying the 10% penalty for early withdrawals. This can be fairly complicated, so I won’t go into much detail, and I strongly suggest you see your CPA before doing this. As long as you take the funds out in “substantially equal payments” over 5 years or until age 59 ½ (whichever is longer), you may be exempt from the penalty, but this only applies to plans, never to IRAs!
7. Fees
Lastly, don’t forget to compare the fees in your company plan (not always easy to do) vs. the fees in your IRA. Fees ultimately affect performance, so all things being equal, even though they rarely are, the lower the fees, the better.
This certainly isn’t a complete list of considerations, but hopefully it helps you make a more informed decision about what to do with your money once you leave your job or retire.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. To view form CRS visit https://bit.ly/KF-Disclosures.
Eric is President and founder of Reich Asset Management, LLC. He relies on his 25 years of experience to help clients have an enjoyable retirement. He is a Certified Financial Planner™ and Certified Investment Management AnalystSM (CIMA®) and has earned his Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®) designations.
