Savings/IRA

Protecting Your Retirement Plan Nest Egg

You’ve worked hard. And, chances are, you’ve deferred the chance to enjoy the fruits of your labors by contributing a portion of your earnings to your employee-sponsored qualified retirement plan. If so, it was a wise decision. Investing your income before taxes maximizes its potential to grow and compound over time, until you need it.

But what happens when you retire?
Do you leave your assets in your old employer’s retirement plan?
Do you take the money in a lump-sum payment?
Or do you roll it over into another investment vehicle, like an IRA, where it can continue to grow free of taxes until you need it?

How you manage those choices – how, when and if you decide to receive distributions from your retirement plan – can have a big impact on the money you’ll have available both today and tomorrow. By understanding your distribution options, and choosing among them wisely, you can ensure that years of savings pay off when you need your nest egg most.

Distribution Options: Pros and Cons

Leaving Assets in Your Current Retirement Plan
With balances of $5,000 or more, retirement plan participants usually have the option of leaving their assets in the qualified plan. If you are happy with the plan and don’t have any current plans for your assets, this option is the easiest and safest way to retain the potential for tax-deferred earnings.

Pros:

Avoids current income taxes, penalties, and 20% mandatory withholding
Assets have the potential to grow tax deferred
Ability to roll over your funds at a later date

Cons:

Investment choices are limited to the employer’s retirement plan selections
Maintaining multiple retirement accounts can be complicated and time consuming
Retirement plan expenses may be deducted from the account

Withdrawing Your Assets in Cash

There are no two ways about it: Financial professionals rarely recommend this option.

Pros:

Immediate, unrestricted use of the money
May be eligible for special tax treatment like forward averaging or net unrealized appreciation rules, to potentially lower tax liability

Cons:

Money generally subject to ordinary income tax and loses tax-deferred status in the future
20% mandatory withholding
May be subject to an additional 10% tax on early withdrawals
Loses the flexibility to move into an employer retirement plan or an IRA after 60 days

Rolling over Your Assets into an IRA

Many consider the best way to avoid federal income taxes and tax penalties and to retain tax-deferred earnings potential is to roll over assets directly into your own Rollover IRA. In a direct rollover, your funds are transferred directly from a former employer's retirement plan to an IRA. In addition to tax deferral, this option offers increased flexibility and control.

Pros:

Avoids current income taxes, penalties, and the mandatory 20% withholding
Assets have the potential to grow tax deferred
Typically broadens investment choices
Maximize flexibility: move Rollover IRA money into another employer’s retirement plan or convert to a Roth IRA at a future date (certain restrictions may apply)

Cons:

IRA money cannot be borrowed
You may have to pay annual IRA fees
Assets not protected from creditors in IRAs to same extent as in qualified employer retirement plans
Special tax treatment on distributions, such as forward averaging and net unrealized appreciation rule, are generally unavailable under IRAs

Which Choice Is Right for You?

If you’ve left or are leaving a job, making the right distribution choice clearly has a big impact on your retirement plan assets. Before meeting with your financial specialist you may want to consider the following options:

I want my money to enjoy tax-deferred growth for as long as possible.
I want all my assets in one place.
I want my assets now.
I want the ability to take loans against my assets.
I want greater investment control and more investment choices.

How to Make Your IRA Last Longer

Make sure to name both primary and contingent beneficiaries. Naming both provides a clear line of succession in case something happens to your primary beneficiaries. It also provides part of a legacy strategy. After your death, your primary beneficiaries can take distributions, cash out the entire amount, or disclaim the assets altogether. Conversely, failing to name a beneficiary may result in your assets going to your estate, depending on the terms of the IRA. This could have negative tax implications and may limit your beneficiaries’ options.
When you have multiple beneficiaries, each may have different stretch opportunities. If there is a large age difference between your beneficiaries, talk to your financial professional about how you can help ensure each of them has the ability to stretch out distributions over his or her own life expectancy.
Revisit your investment strategy. If your goal for your IRA is to enable your children or grandchildren to receive the IRA assets over their lifetimes, your assets may end up being invested with the potential to grow tax-deferred for another 40 or 50 years, depending on the ages of the beneficiaries. Therefore, your asset allocation strategy may be different than that of people expecting to use their assets in retirement in the near future.