Why would you want to move your money out of a 401(k) or 403(b) and roll it into an IRA? Here are some thoughts on the issue:
1. Employer plans have limited investment options and you have no control over the options available. Many of these accounts lost as much as 40% in 2008 alone. People who played it safe by moving money into bond funds and money market accounts during that time saw little to no return and many lost money to inflation. IRAs may have almost unlimited investment options including some that guarantee the principal.
2. Plan guidelines can restrict access to your money. If it’s not in the plan guidelines, you can’t do it. Is it possible that you might need access to some of that money before you retire? IRAs, when setup properly, offer greater flexibility, allowing you many more options for access to your funds in the event of emergency.
3. Direct rollovers from a company plan to an IRA avoid the 20 percent mandatory tax withholding. It’s critical that the funds are moved as a trustee-to-trustee transfer without you touching the funds. This will avoid any taxation issues that might be involved if the money is moved through your accounts.
4. Employer plans have limited distribution flexibility for beneficiaries who are likely to inherit when both you and spouse are gone. When the ”stretch” IRA was created, children and grandchildren were given new options to spread the inherited IRA distributions over their individual life expectancies, if setup properly. This means they are no longer forced into rapid distribution, causing large tax bills. Setting up the IRA properly could save thousands in taxes and create a whole new amount of wealth for beneficiaries.
5. Most plans do not allow the Roth IRA conversion. Roth IRAs grow tax-free and distributions after the five-year holding will also be income tax free. The Pension Protection Act simplified Roth conversions from company sponsored plans. Converting to a Roth IRA has tax implications and should be structured properly to avoid over-taxation.
Retirement plans are about control. As long as your money is under the control of a previous employer, they make the decisions regarding what happens to it. Rolling to an IRA is the best way to get your retirement back under your control. It is imperative that you seek wise counsel when doing this because of the tax and investment implications.
For more information on IRAs or Rollovers or an appointment to discuss your situation, call our office at 205-451-1945.