What Decisions Must Individuals Make Regarding Their Plan Monies When Leaving/Retiring From Their Employer?:

When Leaving an Employer, a Retirement Plan Participant is Faced with One of the Most Important Financial Decisions During Their Lifetime.  The Question is What Options are Available with One’s Retirement Plan Balance.

Other than Those Retirement Plan Participants in a Defined Benefit Pension Plan (a Pension Plan that Pays Retirees a Monthly Pension Amount and Does Not Have an Option to Roll Over a Lump Sum Benefit to an IRA Rollover Account, a Roth IRA Rollover Account or Another Retirement Plan), Most Individuals Have Participated in a Defined-Contribution Pension Plan and/or a Profit-Sharing Plan.  Examples of These Other Retirement Plans Include: 401(k), Roth 401(k), 403(b), Roth 403(b), 457(b), Roth 457(b), 401(a), U.S. Government Thrift Savings Plan and Cash Balance Plans.

FIVE OPTIONS FOR PLAN PARTICIPANTS WHO RETIRE OR CHANGE EMPLOYERS:

The Five Options Below are Available to Those Individuals Who Participate in a Qualified Retirement Plan who are Retiring or Changing Employers:

  1. Roll Over The Retirement Plan Balance Into A Traditional IRA Rollover - Learn More
  2. Roll Over The Retirement Plan Balance Into A Roth IRA Rollover - Learn More
  3. Leave The Retirement Plan Balance In The Former Employer’s Retirement Plan - Learn More
  4. Transfer The Former Employer’s Retirement Plan Balance To The New Employer’s Retirement Plan - Learn More
  5. Withdraw The Retirement Plan Balance From The Former Employer’s Retirement Plan And Have It Taxed - Learn More

 

Option One – Roll Over The Retirement Plan Balance Into A Traditional IRA Rollover:

If this Option is Chosen, it is Recommended that the Transfer be from the Former Employer’s Retirement Plan to an IRA Rollover Account.  The Former Retirement Plan Participant Will Need to Complete the Former Employer’s Required Paperwork to Transmit the Account Balance Directly to the IRA Rollover Account.  This Transmission Can be Completed Either Electronically or with a Check Issued to the Custodian of the IRA Rollover Account on the Former Retirement Plan Participant’s Behalf.

  1. The Pros Of Rolling Over Retirement Plan Assets To An IRA Rollover:
    1. With an IRA Rollover, Former Retirement Plan Participants Will Then Have the Ability to Retain a Professional Advisor to Assist Them in Evaluating Their Portfolios and the Corresponding Underlying Investments.
    2. Generally, an IRA Rollover Offers a Significantly Greater Amount of Investment Options (Literally Tens of Thousands) than the Existing or New Retirement Plan.
    3. Selecting this Option Will Allow the Consolidation of the Former Retirement Plan Participant’s Balance into an IRA Rollover Account with Other Retirement Plan Accounts that the Former Retirement Plan Participant May Have.  Please Note that the Amounts in the IRA Rollover Should Not Be Intermingled in the Same Account with Contributory IRAs or Roth IRAs as well as Other Investments.
    4. Selecting this Option Will Allow the Opportunity to Seek Out Potential Fee-Only1 Advisors that Will Act as a Fiduciary (Advisors that Will Act in the Former Retirement Plan Participant’s Best Interests).
    5. Another Advantage of Selecting this Option is Potentially Lower Fees.  The Former Employer’s Retirement Plan May Be Subject to Higher Fees (Please Note Some Employers May Charge Retirement Plan Participants for These Costs and Deduct Them from Their Account Balances.) than an IRA Rollover Option – Including Management, Investment, Recordkeeping, Administrative and Other Fees.
  2. The Cons Of Rolling Over Retirement Plan Assets To An IRA Rollover:
    1. The Former Retirement Plan Participants Will Have to Spend Time to Interview and Evaluate Potential Advisors Thoroughly in Order to Find a Fee-Only1 Advisor that is a Fiduciary (Advisors That Will Act in the Former Retirement Plan Participant’s Best Interests).

    2. Warning!When Rolling Over Retirement Plan Balances of Any Size, the Former Retirement Plan Participant Unknowingly Will Often Utilize Advisors/ Brokers/ Insurance Agents to Their Detriment that Recommend High Cost and/or Commission-Oriented Products such as Loaded Mutual Funds, Structured Notes, Limited Partnerships, Annuities and/or High-Cost Products.

    3. Often, Former Retirement Plan Participants with Small Balances May Have a Difficult Time Finding a Competent Advisor who is Willing to Handle Smaller Account Balances at Affordable Fees; therefore, the Former Employer’s Retirement Plan May Be a Better Option, if Available.
    4. Beware Placing the Monies to be Invested in an IRA Rollover into a Fixed Annuity.  Please Note Most Fixed Annuities Offer Poor Returns Given the Current Historic Low Interest Rate Environment.  Furthermore, these Products Often Offer High Interest Rates for the First Contract Year and Significantly Lower Rates in Subsequent Years.  These Products Have Long Surrender Charge Periods (Back-End Charges Apply if the Annuity is Surrendered Prior to the End of the Surrender Charge Schedule) Stretching as Long as Five to Ten Years.

      Similarly, a Variable Annuity Policy Should Be Avoided in Almost All Situations.  A Variable Annuity Offers Annuity Subaccounts as the Investment Options (Similar to Mutual Funds but Usually More Expensive).  This Type of Product is Generally Higher Cost Considering the Investment Options and are Generally More Complicated.  Variable Annuities also Have Long Surrender Charge Periods (Back-End Charges Also Apply if the Annuity is Surrendered Prior to the End of the Surrender Charge Schedule) Stretching as Long as Five to Ten Years.

It is Important to Remember to Not Take a Withdrawal if the Intent is to Roll this Money Over, Otherwise, the Former Employer is Obligated to Withhold 20.0% in Federal Taxes.  Subsequently, if the Balance is Rolled to an IRA Rollover Account, the Former Retirement Plan Participant Will Need to Replace the Amount of the Income Tax Withheld in Order to Avoid Taxation on the Amount within 60 Days.  Should the Former Retirement Plan Participant Fail to Rollover the Entire Amount, they Will Be Taxed on the Amount that was Not Rolled Over.  This Entire Situation can be Avoided by Using a Trustee-to-Trustee (Former Retirement Plan-to-IRA Rollover Account) Transfer.

Furthermore, There is Also the Potential that the Former Retirement Plan Participant Would Generally be Liable for a 10.0% Penalty that Applies to Most Individuals Who Take a Withdrawal Prior to Age 59½.

Back To Five Options

 

Option Two – Roll Over The Retirement Plan Balance Into A Roth IRA Rollover

Former Retirement Plan Participants Have the Option of Rolling Roth Retirement Plan Accounts into Roth IRA Rollover Accounts.  They also have the Option of Rolling Pre-Tax Retirement Plan Account Balances to a Traditional IRA Rollover Account and then Convert the Proceeds to a Roth IRA Rollover Account.  Please Remember When Converting a Taxable Plan Balance/IRA Rollover to a Roth IRA Rollover Account, Income Taxes Will Have to be Paid.

Please Note that a Roth IRA Rollover has Very Similar Pros and Cons as that of a Traditional IRA Rollover Account.

Due to the Complexity of Each Former Retirement Plan Participant’s Financial Situation, Please Contact Legend at (412) 635-9210 or (888) 236-5960 for a Complete Discussion of the Options Including Income Tax and Other Implications.

Back To Five Options

 

Option Three – Leave The Plan Balance In The Former Employer’s Retirement Plan:

Special Note: If the Account Balance is Over $5,000.00, the Former Retirement Plan Participant May Leave the Balance in the Former Employer’s Retirement Plan, if the Employer Plan Permits the Balance to be Left in the Plan.  If the Retirement Plan Balance is Between $1,000.00 and $5,000.00, the Former Employer Must Help Set-Up an IRA Rollover Account, if they are Forcing a Distribution to the Former Retirement Plan Participant.  If the Retirement Plan Balance is Under $1,000.00, the Former Employer Can Force a Distribution to the Retirement Plan Participant.

  1. The Pros Of Leaving The Plan Balance With The Former Employer’s Retirement Plan:
    1. The Former Employer’s Retirement Plan May Offer Access to Lower Cost Investment Options than Normally Would Be Available to an Individual Using an Outside Custodian.
    2. Often, there are Usually Not Any Trading Costs (But it Depends Upon the Retirement Plan) within the Retirement Plan Although Trading Costs Outside the Retirement Plan if moved to an IRA Rollover are Normally Not Material.
    3. If the Former Retirement Plan Participant has a Sophisticated Investment Skill Set, Leaving their Monies within the Former Employer’s Retirement Plan May Be a Way to Save Advisory Fees.
    4. Many Times, Former Retirement Plan Participants with Small Balances May Have a Difficult Time Finding a Competent Advisor who is Willing to Handle Smaller Account Balances at Affordable Fees Without Charging Commissions; therefore Leaving the Retirement Monies at the Former Employer’s Retirement Plan May be a Better Option.
    5. It is Convenient and Does Not Require Any Action to be Taken.
  2. The Cons Of Leaving The Retirement Plan Balance With The Former Employer’s Retirement Plan:
    1. The Former Employer’s Retirement Plan May Offer Poor and/or Expensive as well as Limited Investment Options.
    2. In Addition to Investment Fees, the Former Employer’s Retirement Plan May Be Subject to Other Higher Fees Including Management, Recordkeeping, Administrative and Other Fees.  Please Note Some Employers May Charge Retirement Plan Participants for These Costs and Deduct Them from Their Account Balances.
    3. The Former Retirement Plan Participant May Have Other Outside Investments and Would Like to Consolidate their Accounts at One Custodian to Facilitate Monitoring Their Entire Investment Portfolio.  Leaving Those Assets at the Former Employer’s Retirement Plan Would Prevent the Former Retirement Plan Participant from Consolidating the Accounts.
    4. The Majority of the Time, Investment Options are Limited to Those Offered in Their Former Employer’s Retirement Plan Compared to Tens of Thousands of Investment Options Available Within an IRA Rollover Account.
    5. By Leaving the Account Balance at the Former Employer’s Retirement Plan, the Former Retirement Plan Participant May Need to Communicate with the Former Employer in Order to Make Investment and/or Beneficiary Changes.

Back To Five Options

 

Option Four – Transfer The Former Employer’s Retirement Plan Balance To The New Employer’s Retirement Plan:

If the New Employer Permits it, the Retirement Plan Participant May Rollover the Former Employer’s Retirement Plan Assets to the New Employer’s Retirement Plan.

  1. The Pros Of Rolling Over Assets From A Former Employer’s Retirement Plan To A New Employer’s Retirement Plan:
    1. The New Employer’s Retirement Plan May Offer Access to Lower Cost Investment Options than Normally Would Be Available to an Individual Using an Outside Custodian or in their Former Employer’s Retirement Plan.
    2. The New Employer’s Retirement Plan May Offer Access to a Larger Number of Investment Options than Their Former Employer’s Retirement Plan.
    3. There are Usually Not Any Trading Costs Within Retirement Plans, but there are Exceptions.  However, if an Individual Wanted to Use an Outside Custodian, Trading Costs are Usually Immaterial.
    4. If the Retirement Plan Participant has a Sophisticated Investment Skill Set, Moving the Monies to the New Employer’s Retirement Plan May Be a Way to Save Advisory Fees.
    5. Multiple Company Retirement Plan Accounts Can Be Consolidated at the New Employer’s Retirement Plan.
    6. No Required Minimum Distribution (Over Age 72) Needs to be Taken if the Retirement Plan Participant is Still Working for the New Employer.
  2. The Cons Of Rolling Over Assets From A Former Employer’s Retirement Plan To A New Employer’s Retirement Plan:
    1. The New Employer’s Retirement Plan May Offer Poor and/or Expensive as well as Limited Investment Options in Comparison to an IRA Rollover Account or Their Former Employer’s Retirement Plan.
    2. The New Employer’s Retirement Plan May Be Subject to High Fees – Including Management, Investment, Recordkeeping, Administrative and Other Fees in Comparison to an IRA Rollover Account or Their Former Employer’s Retirement Plan.  Please Note Some Employers May Charge Retirement Plan Participants for These Costs and Deduct Them from Their Account Balances.
    3. If the New Employer’s Retirement Plan Only Offers Annuity Subaccounts as the Investment Options, the Annuity Subaccounts are Generally Higher Cost Investment Options and are Potentially More Complicated.
    4. The New Employer’s Retirement Plan May Not Allow Any Withdrawals.

Important Tip:

Before Rolling Over Retirement Plan Assets from a Former Employer to a New Employer’s Retirement Plan, it is Important for the Retirement Plan Participant to Thoroughly Investigate the New Employer’s Retirement Plan.

If the Retirement Plan Participant Decides to Roll the Former Retirement Plan Assets into an IRA Rollover, They Should Not Co-Mingle These Assets with Any Other Monies Since Co-Mingled Monies Cannot Be Rolled Over to a New Employer’s Retirement Plan.  The Retirement Plan Participant Will Need to Open a Separate IRA Rollover Account to Hold the Monies Until the Retirement Plan Participant is Eligible to Participate in the New Employer’s Retirement Plan.

Back To Five Options

 

Option Five – Withdraw The Retirement Plan Balance From The Former Employer’s Retirement Plan And Have It Taxed:

Withdrawing Monies from Retirement Accounts of All Types and Not Rolling Over the Balances into an IRA Rollover or New Retirement Plan is Usually the Worst Financial Decision that One Can Make when Leaving an Employer.  Pre-Tax Retirement Plan Withdrawals are Always Subject to Income Taxes at Ordinary Income-Tax Rates.  Additionally, Withdrawals for Those Under Age 59½ are Generally Subject to a 10.0% Tax Penalty.

  1. The Pros Of Withdrawing From The Retirement Plan:
    1. The Monies Remaining After Income Taxes are Assessed, While Liquid, Can Be Saved or Spent in Any Fashion.
    2. However, Transferring Savings Into A Retirement Plan Or An IRA Rollover Is Preferrable.
  2. The Cons Of Withdrawing Monies From The Retirement Plan And Not Rolling Over The Proceeds:
    1. Income Tax Deferral on the Retirement Plan Proceeds Will Be Lost Forever.
    2. Income Taxes Can Be Substantial in the Year that the Withdrawal is Made.
    3. Future Earnings on the Retirement Plan Proceeds Will Be Taxable Each Year.
    4. If the Retirement Plan Participant is Under the Age of 59½, Withdrawals may be Subject to a 10.0% Penalty Tax on Top of Federal and State Income Taxes.