Consolidating Company Retirement Plans

For most people, I believe consolidating your various company retirement plans and IRA’s into a single IRA is the best route to go for a number of reasons 1,2,4:

  1. Convenience
    1. It is generally easier to manage the investments for one account than several
    2. Administrative ease regarding things like changes in address, beneficiary changes, etc.
    3. You will get fewer statements
  2. Managing required minimum distributions starting at age 70 ½ should be easier. Once you reach age 70 ½, you are required to take out a specific minimum withdrawal each year from your retirement accounts. If you have multiple company retirement plan accounts, it makes the calculation of the required withdrawal a more difficult, and increases the risk that one or more of the accounts might get missed when calculating the required minimum withdrawal each year. Also, all IRA balances can be combined for calculation purposes and the required withdrawal amount can be made from any one or more of the IRAs, giving you more control over which accounts and investments to liquidate to fund the distribution. Most company retirement plans cannot be aggregated like this, and require their own separate calculation and distribution.
  3. Company retirement plans may not have as many options as IRA’s do for tax deferral for spousal and subsequent beneficiaries.
  4. Certain exceptions to the 10% premature distribution penalty tax for individuals under the age of age 59 1/2, such as for qualified first-time home purchases, certain higher education expenses, and health insurance premiums while unemployed are not available for withdrawals from company retirement plans.
  5. If you have company stock in your retirement plan, you may be able to take advantage of net unrealized appreciation (NUA) tax treatment for that stock by following the tax rules for rolling the company stock and other plan assets out of the plan. A word of caution, if you roll the full company retirement balance (including the company stock) to an IRA, you will likely lose the option to elect the NUA treatment for the company stock in the plan3.

Disclaimers

1Beginning 1/1/15, an IRA participant is allowed only one indirect rollover in any 12-month period across all IRAs that he or she owns. An indirect rollover is a participant-initiated distribution in which the participant receives the proceeds and subsequently rolls those proceeds into another (or the same) IRA within 60 days. Individuals can continue to make unlimited trustee-to-trustee transfers (transfers directly between IRAs) as well as unlimited conversions from traditional IRAs to Roth IRAs. Clients should consult their tax advisor prior to effecting a rollover.

When considering rolling over the proceeds of your retirement plan to another qualified option, such as an IRA, SEP, SIMPLE IRA, Roth IRA or other type of qualified account, please note that you have the option, among others, of leaving the funds in your existing plan or transferring them into a new employer’s plan. You should consult with the Benefits department of the applicable employer to learn about the options available to you under your plan and any applicable fees and expenses. Tax consequences may apply if you were to withdraw the funds and there are additional tax consequences for transferring stock out of your retirement plan. Please consult with a tax or legal advisor before taking such option. Neither, Atlanta Financial Associates, Commonwealth Financial Network, or their Representatives, can provide tax or legal advice. You should also know that depending on the state where you reside, assets held in a retirement plan may enjoy greater protection from creditors than in other types of tax –qualified vehicles. You should also consider the different types of fees and services that apply to your plan and compare them to any new option that you are considering.

2Pension, 401(k), and profit-sharing and money-purchase plans are protected from creditors and civil suits under the Employee Retirement Income Security Act of 1974 (ERISA). IRAs are protected from creditors in case of bankruptcy (Bankruptcy Abuse Prevention and Consumer Protection Act of 2005). Protection from civil suits is dependent on individual state statutes.

3By rolling company stock into an IRA, the ability to exercise the Net Unrealized Appreciation (NUA) strategy may be lost. The ability to use other tax-efficient strategies, such as 10-year forward averaging, may also be lost. Clients should discuss the tax ramifications of rolling over an employer-sponsored retirement plan to an IRA with their tax professional.

4Before rolling over the proceeds of your retirement plan to an Individual Retirement Account (IRA) or annuity, consider whether you would benefit from other possible options such as leaving the funds in your current plan or transferring them into a new employer’s plan. Consult with each employer’s Benefits Department to learn about important plan features and rules. Be sure to compare the fees and expenses of each plan and investment option to those of any other investments that you are considering. Review plan documents and the IRA agreement, as well as the prospectuses for plan investment options and any other investments that you are considering. Your registered representative can help explain any new product being offered. Neither, Atlanta Financial Associates, Commonwealth Financial Network, nor their representatives or affiliates provide tax or legal advice. Consult with a tax or legal advisor to discuss any questions or concerns that you have, such as the tax consequences of withdrawing funds or removing shares of an employer’s stock from a retirement plan and whether money invested in a retirement plan receives greater protection from creditors and legal judgments in your state than money invested in an IRA or annuity. Also consider that you may be able to take taxable, but penalty-free withdrawals from an employer-sponsored retirement plan between the ages of 55 and 59 1/2 that you would not be able to take if you invest in an IRA or annuity. Additionally, if you plan to work after you reach age 70 1/2, you may not be required to take minimum distributions from your current employer’s retirement plan but would be required to do so for funds invested in an IRA or annuity.