Employees who quit or retire will often have to decide whether to leave their
qualified retirement plan account (e.g., 401(k) account) alone or to roll it over to
an IRA. The answer, of course, depends on the individual's specific circumstances.
However, there are some general pros and cons to consider.
Postmortem tax-deferral opportunities. Beneficiary designations as of
the date of the owner's death control the availability of various postmortem
tax-deferral opportunities. Therefore, it is important to set up these designations
to maximize those opportunities. Greater flexibility generally is afforded in
beneficiary designations for IRAs and in stretching out the tax-deferral period.
Investment choices. Although some qualified plans offer self-directed
accounts, many restrict the available investment choices. However, most IRA providers
offer their entire investment portfolio for the participant to choose from. On the
other hand, the qualified plan may provide access to better investment opportunities
(such as a chance to buy a more favorable class of mutual fund shares) than would be
available to the IRA.
Availability of taking withdrawals. While most qualified plans
restrict the availability of withdrawals, IRA withdrawals are available at any time
and in any amount. However, an employee who separates from service at age 55 or older
can take distributions from the qualified plan without being subjected to the 10%
early withdrawal penalty. With an IRA, the employee may have to wait until age
59½ to take penalty-free distributions.
Applicable fees. IRAs may be subject to fees not charged to the
qualified plan account.
Creditor protection. Qualified retirement plans have federal creditor
protection in the case of malpractice, bankruptcy, divorce, business problems, or
creditor problems. IRAs are not protected in all states.
Please contact us if you have questions about qualified plan rollovers or the tax
aspects of retirement saving.
This publication is distributed with the understanding that the author, publisher and
distributor are not rendering legal, accounting or other professional advice or
opinions on specific facts or matters, and, accordingly, assume no liability
whatsoever in connection with its use. The information contained in this newsletter
was not intended or written to be used and cannot be used for the purpose of (1)
avoiding tax-related penalties prescribed by the Internal Revenue Code or (2)
promoting or marketing any tax-related matter addressed herein. © 2015