When you leave your employment, what should you do with the retirement plan left behind? Well, the best advice we can give is: It depends on your unique circumstances.
Reasons to Leave Assets in the Company Plan:
Generally, plan assets will receive Federal protection under ERISA for general creditors while State law protects IRAs. If your state offers limited or no creditor protection, and you have personal concerns around malpractice, divorce, or creditor problems or other types of lawsuits, creditor protection should be considered. IRAs will receive Federal protection in bankruptcy situations only up to a current cap of $1,362,800; not for other types of judgements.
If there is a Divorce, QDROS (Qualified Domestic Relations Orders) are available only from company plans, not from IRAs. Distributions from plans divided by a QDROs are penalty-free for early withdrawals. However, that benefit is lost -if those funds are rolled over to an IRA.
If you are a non-spouse beneficiary, Inherited IRAs cannot be converted to an Inherited Roth IRAs, but inherited company plan assets CAN be converted to an Inherited Roth IRA for a designated beneficiary.
If you are of age, you may be able to delay plan RMDs with the “Still Working” exception if IRA funds are rolled over into your new company plan, with a few exceptions.
If immediate or near-term access is needed to your funds, the age 55 plan exception to the 10% penalty should be kept in mind. If you are at least 55 years old when you leave your job but not yet 59.5 and you need access to your funds, leave the money in your plan and take your withdrawals from there. The distribution will be subject to tax, but no 10% penalty. If it is rolled into an IRA, withdrawals before age 59.5 will be subject to the 10% early distribution penalty.
For state and local “Public Safety Employees” funds can be withdrawn penalty free if the separation from service was in the year the employee turned age 50 or older.
And, for participants in 457(b) plans, they are exempt from the 10% early withdrawal penalty, but once the funds are rolled over into an IRA, this 457(b) plan penalty exception is lost.
Reasons to Rollover the plan to an IRA:
First and foremost, an IRA rollover would allow the plan participant more flexibility without the administrative hurdles or delays that plans can impose. As Ed Slott says, "The rule of the Plan is the rule of the Land".
Rollovers allow plan participants to take control of their funds. An IRA can be a highly flexible and customized investment vehicle versus being in a plan with limited choices. IRA owners can receive attention and advice from their own personal financial advisor, rather than a client services representative at a 1 800 number who may or may not be able to advise on planning options.
If you are charitably inclined and at least 70.5 years of age, QCDs, or Qualified Charitable Distributions, which allow the amount you give to the charity to be excluded from Adjusted Gross Income, even if you claim the standard deduction, can only be done from an IRA, not from a company plan.
Rollovers to an IRA allow more ease for creating the stretch IRA for Eligible Designated Beneficiaries after the SECURE Act as well as greater flexibility in dealing with the new 10-year rule for non-eligible designated beneficiaries. It is still unknown how plan sponsors will handle these very new issues. There is a possibility that plans will not want to get involved in the administrative nightmare of keeping track of the beneficiaries of deceased ex-employees as they take required distributions. Instead, plans may simply pay out the beneficiary in one year or at best, five years.
If you have highly appreciated company stock, consider distributing the stock in-kind to a taxable account and rolling the remainder of the plan assets to an IRA to utilize the more favorable tax treatment, Net Unrealized Appreciation (NUA). If done correctly, the only tax owed would be on the cost of the stock when it was acquired by the plan and the participant will have access to more favorable capital gains tax treatment when the stock is eventually sold. There are strict rules around this that must be followed; make sure you seek qualified advice!
The IRA is a great place to consolidate and control the various risks (market risk, withdrawal risk, tax risk, inflation and longevity risk) that come online with a portfolio that will now be or will eventually be in distribution mode. Managing and coordinating these risks effectively will best position the IRA owner to maximize their income, improve their investment results and minimize the amount they pay in tax.
You will have greater flexibility and control when the funds are in an IRA to implement a partial Roth conversion strategy.
When Required Minimum Distributions come online, IRAs are aggregated for calculating RMDs. An IRA owner can take his RMD from any one or a combination of his own IRAs. With company plans, the employee generally has to take his RMD from each plan separately, with 403(b)s being the exception here; RMDs can be taken from any one of a person’s 403(b) plans.
Former employees have options around what to do with their plan funds when they leave a company. Consideration should be given to: When will you need access to the funds? What is the control and flexibility you will require over your assets? And, Will creditor protection be necessary? Make sure you seek qualified advice to ensure you are choosing the best option for your unique situation.