Advising Clients on Key Rollover Decisions

Six Options:

  1. IRA rollover
  2. Leave it in the company plan
  3. Roll it to a new company plan
  4. Lump-sum distribution
  5. Roth conversion
  6. In-plan Roth conversion

Reasons to Roll Over Company Plan Money to an IRA

Once a client with a company plan retires from the company, serious consideration should be given to rolling those funds over to an IRA. However, many clients when advised to roll over, do nothing. They often do not see the benefit of the rollover and because of that, advisors are not able to bring in more rollover dollars and help clients and their beneficiaries plan for the retention of those retirement funds.

Sales Idea
Advisors can bring in big rollover dollars if they can get clients to see the true long-term benefits of rolling company plan funds to an IRA after retirement. Following are some powerful reasons for clients to do the IRA rollover.

Create Stretch IRA for Beneficiaries
The best case for an IRA rollover is the ability to keep the money growing tax-deferred for your beneficiaries. A non-spouse designated beneficiary of an IRA can stretch distributions on the inherited IRA over his or her life expectancy. Many plans do not allow this stretch option even though the tax code permits it. The plans generally do not want to get involved in the administrative nightmare of keeping track of the beneficiaries of ex-deceased employees for 30, 40 or 50 years as they take required distributions. So instead, the plans simply pay out the beneficiary in one year or five years at best.

Even if the plan beneficiary is the spouse, the spouse will also be cashed out in five years. But a spouse can rollover the company plan money to her own IRA, name her own beneficiaries and when she dies, those beneficiaries will get the stretchout. A non-spouse (a child or grandchild) beneficiary on a company plan can transfer the company plan balance by trustee-to-trustee transfer (not a 60-day rollover)to a properly titled inherited IRA and then stretch distributions from the IRA, just the same as if the non-spouse beneficiary inherited from an IRA.

The best option to guarantee the stretch IRA for children or grandchildren is to roll the company plan funds over to an IRA as soon as possible after retirement. This way, beneficiaries never have to deal with the company plan and the company bureaucracy which may mess up the non-spouse transfer. Once the funds are in the IRA, all they have to do to guarantee the stretch is to make sure that the children are named as beneficiaries on the IRA beneficiary designation form.

The way to put this to clients who are stubborn about the rollover is this: Ask them “Do you want your retirement account to last 50 years or five years for your children?” Hopefully, clients will answer 50 years and then you will tell them that you can guarantee that with the IRA rollover, but if the funds stay in the plan, you can almost guarantee that the children can be cashed out and taxed in five years at best.

Plans Must Allow a Post-Death Transfer to Non-Spouse Beneficiaries

Under the Pension Protection Act of 2006, beginning in 2007, non-spouse plan beneficiaries can transfer the company plan balance by trustee-to-trustee transfer to a properly titled inherited IRA and then stretch distributions from the IRA, just t6he same as if the non-spouse beneficiary inherited from an IRA.

As of 2010, as amended by The Worker, Retiree, and Employer Recovery Act of 2008, signed into law on December 23, 2008, this provision became mandatory for all employer plans.

Even though beneficiaries can transfer an inherited plan to an inherited IRA (or convert the inherited plan to an inherited Roth IRA), the IRA rollover is still a better option because beneficiaries do not have to deal with the company plan and mistakes that could happen there. Beneficiaries have better control with an inherited IRA.

However, an inherited IRA cannot be converted to an inherited Roth IRA.
The stretch IRA is the most compelling argument for the IRA rollover.

Estate Planning
The IRA can more easily be coordinated with the client’s overall estate plan than the company plan assets. In addition to the ability for non-spouse beneficiaries to stretch distributions from the inherited IRA over their lifetimes, IRAs offer the option of splitting accounts and naming several primary and contingent beneficiaries, if the IRA custodian allows. Clients can name anyone they wish as their IRA beneficiary. Funds in a company retirement plan are subject to federal law that, for the most part, requires participants to name their spouse as beneficiary unless the spouse signs a waiver. Naming the spouse as plan beneficiary could cause a loss of the first estate exemption. The IRA rollover makes the estate plan more flexible. The waiver must still be filed with the plan before the funds can be rolled over to an IRA.

Investment Options
Within an IRA clients have a universe of investment options to choose from. They do not have to pick from a limited number of investments typically offered by the company plan. Also, you can help clients customize investment choices to meet their personal needs. That’s important in these volatile times. You can instantly make changes that fit the client’s risk tolerance and retirement needs without going through the bureaucracy at the company plan, where the client is now a lowly ex-employee.

Clients who are ex-employees always receive better service and more personal attention from financial advisors than from some inexperienced phone rep at the firm the company plan has been outsourced to.

IRA Annuities
You may advise clients to consider investing some of their IRA in an annuity. Everything you read says never to put an annuity in an IRA because the annuity is already tax- deferred. But that thinking is wrong. An annuity that offers an annually increasing guaranteed death benefit might turn out to be the best investment in the IRA while the market is in a tailspin. When the client dies, beneficiaries will receive a guaranteed death benefit. That is a valuable feature. It provides a hedge against an unstable market.

IRAs Have No Withdrawal Restrictions
Company plans may have restrictions on withdrawals. In an IRA, clients have immediate access to funds, regardless of age. Even if you are under age 59½, you can withdraw from your IRA. You’ll pay tax and the 10% penalty, but you still have the ability to withdraw quickly. The company plan may have restrictions on withdrawals before age 59½. If you are no longer working for the company and leave the money in the company plan, it still may take some time to access your cash. If you need it right away, that will put unnecessary pressure on you at a time when the last thing you need is more problems.

Consolidation and Control
The IRA is a handy place to consolidate all retirement funds. It can help clients stay in control by not having to keep track of several company plans and IRAs and the beneficiary and withdrawal options on each plan. Clients won’t have to worry about required distributions from both the company plan and the IRA once all the funds have
been rolled to an IRA.

Disclosure: Please be sure to speak to your advisor to carefully consider the differences between your company retirement account and investment in an IRA. These factors include, but are not limited to changes to availability of funds, withdrawals, fund expenses, fees, and IRA required minimum distributions.