401(k) and Other Employer Retirement Plan Rollovers

What should I do with my 401(k) (or other retirement plan) when I leave my job or retire?  This question is one of the most common questions we receive as we work with clients who are approaching retirement.  Most people approach retirement with much, if not most, of their net worth in 401(k) or other types of retirement plans..  Making the proper decision about a 401(k) rollover can be a critical component of successful retirement planning.

It may or may not be in your best interest to move your 401(k), 403(b), 457 plan, TSP, or other company retirement plan when you leave your company or retire.  There are several factors that must be weighed.  Many financial advisors, by default, recommend rolling your plan into an IRA.  This may be the best option - but then again, it may not.  Unlike many financial advisory firms, PARAGON can help you manage your 401k whether you move it to an IRA, or leave it with your employer.  Thus, we have no economic incentive to recommend an IRA rollover if you would be better off keeping your 401k where it is.

Is Moving My 401(k), 403(b), 457, or TSP in My Best Interest?

As a fiduciary, we must recommend what appears to be in your best interest.  Below are some of the most common Pros and Cons for you to consider.  Choosing incorrectly can cost you thousands of dollars in taxes, reduced investment returns, liquidity, and opportunities to leave money to your heirs.  It is important to get the rollover decision right - and we can help you.

Common Reasons to Roll your 401(k), 403(b), 457, or TSP to an IRA

401k rollover to IRA assistance, Jacksonville FL
  • Your employer retirement plan is an older, more expensive plan.  Many employer retirement plans have high (and often hidden) fees which drastically reduce investor returns.   With recent regulatory and legislative emphasis on 401(k) plans, this situation is improving, but many employer retirement plans still suffer from high fees and investment costs which can be lowered by rolling those dollars to an IRA.
  • Your plan has limited investment options.  According to the Investment Company Institute and Brightscope research conducted in 2014, the average 401(k) or 403(b) plan offers 25 investment options.  While 25 may seem like a lot, we often find many of the investments are only duplicates of each other.  Most plans eliminate asset classes that are vital to building an efficient portfolio designed to maximize return within a given unit of risk.  For example, many plans eliminate investment options such as international bonds, international small company stocks, real estate, health care.   
  • Your employer retirement plan has limited distribution options.  Many plans limit the ways in which you can take income from the plan. This is particularly the case with the US Government's TSP plan.  Some plans only offer annual withdrawals, others offer only a single lump sum payment or an annuity (monthly income stream) option. In the event that you have unexpected emergencies or your retirement goals include occasional travel, weddings, gifts, or home remodeling projects - you may find these limited withdrawal options to be frustrating.  Your own IRA, on the other hand, has no limitations on how or when you make withdrawals from your own account.
  • Your plan has limited beneficiary options.  Many 401(k), 403(b), 457 plans, or TSP plans do not allow you to leave your money to a trust set up for your beneficiaries. Additionally, FEW plans will allow your heirs to "Stretch" the retirement plan once you have died.  (The "Stretch" option means that your non-spouse heirs can take annual withdrawals over their lifetime in order to prevent a forced taxable payout of the plan soon after you have died.)  The tax implications of this limitation are tremendous to non-spouse heirs. If you desire for your children or grandchildren to enjoy your 401(k) or 403(b) dollars for their lifetime - then an IRA rollover should most certainly be performed.
  • Required Minimum Distributions can be difficult. After age 70 and 1/2, if you are no longer with your company, you must make mandatory withdrawals from your retirement plan based upon a schedule found in IRS Pub. 590. If these withdrawals are not taken on time you will face a 50% tax penalty on any dollars not withdrawn.  If you have several retirement plans, you must make these distributions out of each and every plan.  Most people choose to consolidate their 401(k) or other retirement plans into one account for simplicity of record keeping.  
  • Mandatory 20% Tax Withholding.  Retirement Plans are required to withhold a mandatory 20% tax on taxable distributions - whereas an IRA has no such requirement.
  • You don't want your old company "knowing your business."  This is actually one of the more common reasons that people rollover their 401(k), 403(b), or TSP when they leave or retire, and is self-explanatory.
  • You have multiple 401(k), 403(b), or TSP accounts.  It is difficult maintain a sound investment policy with multiple accounts. Also, the record keeping required to comply with your Required Minimum Distributions beyond age 70 and 1/2 will become burdensome.  It is our experience that as people age, they prefer to simplify their finances, not make them more complex.  Often it makes sense to consolidate these accounts into one.  A single, low-cost IRA with a fully-diversified investment portfolio custom-built to your particular needs and risk tolerance is usually the best choice for handling your retirement nest egg throughout retirement.

The above list is only a few of the reasons that clients rollover their company retirement plans to an IRA.  If you choose to do so - it is important to do it CORRECTLY.  Incorrectly performing a rollover of your company retirement plan may cause you significant taxes, penalties and hassles that a correct 401(k) rollover would avoid.  At PARAGON, we have performed hundreds of rollovers correctly, without tax consequences, for our clients when it was appropriate to do so.

Common Reasons Not to Roll your 401(k), 403(b), 457, or TSP to an IRA

  • You are not yet age 59 and 1/2.  Unlike IRAs, which require that you reach age 59 and 1/2 before taking distributions (ignoring exceptions), an employer retirement plan allows penalty-free distributions beginning at age 55, as long as you separate from that company after you turn 55,  and you leave the 401(k), 403(b), or TSP plan with the employer.  If, on the other hand,  you were to roll your 401(k) to an IRA, you would lose this early distribution option.  If you feel you may need access to your employer retirement plan funds between ages 55 and 59 and 1/2, then you should consider leaving your retirement plan with your employer.
  • You have a large position of highly appreciated company stock in your 401(k).  If this is the case, then the most prudent course of action would be for us to help you explore if you have NUA (Net Unrealized Appreciation) treatment available.  NUA treatment allows you to distribute the stock directly from your plan into a brokerage account - and afterwards, if you hold your stock for at least one year, sales of the stock at a future point in time are taxed as capital gains instead of ordinary income. This difference in tax treatment can mean substantial savings over the course of your retirement. Additionally, unlike IRAs and employer retirement plans, there is no requirement for you to sell the stock at all - which means that you are not forced to pay taxes on these dollars during your lifetime if you do not need them.  It is important to know, however, that when you distribute the stock to your brokerage account - you must pay regular income tax on the cost basis of the stock at that time.  Our team can assist you with the tax analysis on an NUA option, to determine if it makes sense for you.
  • You have certain irreplaceable investments in your plan that you like.  These are found more commonly in 401(k) plans than in 403(b), 457, or TSP accounts.  Some company plans offer a "Stable Value" fund that guarantees a certain interest rate and has no volatility; other company plans offer "private label" investments that are not available elsewhere.  If this is the case, you may wish to keep some of your dollars in your employer retirement plan as opposed to rolling them to an IRA.

Rollover or No Rollover - Either Way, We May Be Able to Help You

As mentioned above, PARAGON helps clients manage all of their retirement funds - not just the ones rolled over to an IRA account with one of our custodians.  As a fee-only investment advisory firm, we have many clients who depend upon our watchfulness and expertise to manage their employer retirement accounts - right where they are - with their employer.  Few financial advisory firms offer this service, but we believe that it is necessary to take a holistic approach to financial and retirement planning in order to achieve the best results.  After all - why would any financial advisor who is truly acting in your best interest - ignore what may be your very largest asset?

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

Investment Advisory Services Provided by Paragon Wealth Strategies, LLC, a registered investment adviser.

Paragon Wealth Strategies
10245 Centurion Pkwy N. Ste. 106 Jacksonville, Florida 32256
Phone: (904) 861-0093