To rollover or not to rollover: Rolling over retirement plan balances involves some consideration

Leaving an employer involves myriad decisions including what to do with retirement plan balances you’ve accumulated during your employment. I can’t help but notice the signs around Racine offering to help you move your money but is this always the right decision?

There are a number of advantages to moving your previous employer’s retirement plan which include an expanded range of investment choices, preserving tax deferred status and simplifying administrative tasks (who really wants to update beneficiary designations or process change of address forms with multiple companies when it can be done once?).

What I think is sometimes missed in the discussion are the potential advantages of just leaving the account with your previous employer. One advantage is the ability to use investment options that are unique to your employer’s retirement plan which are not available elsewhere. For example, we’ll often see stable value funds which pay an interest rate significantly higher than what’s available through CDs or bonds. In addition, the operating expenses for the mutual funds offered in your employer’s plan may be lower than what you can buy on your own.

Another reason for leaving the account is more flexibility to make withdrawals depending on the type of plan and your age when you leave the company. For example, typically 401(k) or 403(b) retirement accounts allow for penalty-free withdrawals if you separate from your employer after age 55. For Traditional IRAs, you typically need to wait until age 59.5 to avoid the early withdrawal penalty (unless you qualify for a handful of exceptions).

Why wouldn’t these advantages be adequately explained by a financial institution trying to convince you to move the money? If you leave the money, their ability to generate a commission is lost. If moving the account does make the most sense for you, doing it correctly is essential to avoid unpleasant tax surprises in the future.

Ideally, the transfer is done directly from one company to another without you receiving the money along the way. This minimizes the chances of paying taxes on the transfer. If you happen to own any of your employer’s stock in the plan, additional tax benefits are available while the stock is still in your retirement plan. Through the “net unrealized appreciation” strategy, you can pay significantly less tax on the employer stock than you otherwise would. Once the company stock is transferred to an IRA, the special tax treatment is lost!

IRS Publication 575 is a good source of information with more details on the concepts discussed above. Unless there’s a relatively small balance, most retirement plans don’t impose a time limit to make a decision so taking your time to understand your options is critical to your future financial success.

As seen in the Racine Journal Times | May 5, 2019

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