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Time to Rollover Your Employer Plan? Know Your Options

For years we saw and heard the commercials – rollover your 401(k) to an IRA. They suggested that this was the only option – and the best option – for you. But it was not the only option; and it might not be the best option for you. Here are your six, yes six, options. They should all be carefully considered before you decide the best option for you. These options are available to plans with employees – not all options will apply to sole proprietor plans. Most options will not apply to SEP and SIMPLE plan participants.

1. Do a rollover to an IRA. There are many benefits to this option. It is a tax-free transaction when a direct rollover is used to move the funds. IRAs have more investment choices and are more flexible when it comes to distributions and financial planning. You generally get better service from your personal advisors than you will get from the 800 number for the plan.

2. Leave the funds in the company plan. You don’t have to do anything to accomplish this. The plan may hold life insurance that you cannot replace. An employer plan has greater creditor protection. If you are still working you may be able to delay required minimum distributions (RMDs). If you separate from service in the year you turn age 55 or later there is no 10% early distribution penalty on distributions made before age 59 ½. The age is reduced to 50 for federal, state or local public safety employees.

3. Roll your plan funds to the plan of a new employer. The benefits of this option are the same as in option 2.

4. Take a Lump-Sum Distribution. With this option you take a total, taxable distribution of all the plan funds. This option is beneficial when you need the funds for pressing and immediate financial needs such as foreclosure, eviction or medical expenses. If a plan holds highly appreciated shares of stock in the company that employs you, net unrealized appreciation (NUA) can provide significant tax benefits for some individuals. Two much less common tax benefits are 10-year averaging and 20% capital gain treatment (the plan participant must have been born before 1936 to qualify).

5. Take a Lump-Sum Distribution. With this option you take a total, taxable distribution of all the plan funds. This option is beneficial when you need the funds for pressing and immediate financial needs such as foreclosure, eviction or medical expenses. If a plan holds highly appreciated shares of stock in the company that employs you, net unrealized appreciation (NUA) can provide significant tax benefits for some individuals. Two much less common tax benefits are 10-year averaging and 20% capital gain treatment (the plan participant must have been born before 1936 to qualify).

6. Do a Roth IRA Conversion. All employer plan funds can be converted directly to a Roth IRA. If there are any after-tax funds in the plan, they can be converted – tax free – to a Roth IRA. The conversion will be taxable and it is an irrevocable transaction. Gains in the Roth IRA will be tax free when distributed as a qualified distribution. There are no RMDs during the Roth owner’s lifetime.

7. Use In-Plan Roth Conversions. Funds inside an employer plan can be converted to a plan Roth account if the plan offers a Roth feature and offers in-plan Roth conversions. The benefits of this option are the same as in option 5 except that there are RMDs from a plan Roth once the plan participant reaches age 70 ½ (unless there is a still-working exception in the plan). 


Reprinted from The Slott Report, 8/22/2018, with permission. Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article. Copyright © 2017 Ed Slott and Company, LLC

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