Rollovers from Qualified Plans to IRAs



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.

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