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401(k) and IRA Rollovers -- It’s All Greek To Me!
Today is the first day of the rest of your life. You are about to retire or just retired or left one company to join another or perhaps have been downsized. Now what? For many professionals, your 401(k) distribution could be the single biggest check of your life.
Advising investors on 401(k) and IRA rollovers with the objective of retirement income is definitely a speciality. In our opinion, the two most important characteristics of a specialist are experience and focus. The principals with Regal Wealth Group have had daily experience with 401(k) and IRA rollovers since 1991 when we worked primarly with aerospace employees. As far as focus, more than 95% of our clients have an IRA account where we maintain a fiduciary responsibility to manage and monitor their retirement assets. We understand the tax laws pertaining to IRAs and we are specialists at the 401(k) rollover process.
Essentially, you have three choices for what to do with money accumulated in your 401(k).
Option #1: Roll over to an IRA.
Option #2: Stay put in the plan (if or for as long as allowed) or roll to a new employer’s plan.
Option #3: Take a lump-sum distribution and pay the often hefty taxes now.
The choice you make here is probably the most important financial decision of your lifetime. In a way, it’s like deciding where to park your car for easy access, convenience, and safety when it’s off the road, only with much more serious financial ramifications. In tandem with the five simple steps for protecting your retirement savings, your decision about 401(k) assets can make or break your retirement.
To gauge the appropriateness and possible ramifications of each option, you and your advisor will need to take the following factors into consideration:
 When will you need the money?
- What will your tax bracket be in retirement?
- How is your health?
- How much money will you need for retirement?
- How much is the lump-sum distribution?
- How old are you?
- What is your estate plan?
- Who will pay the income tax?
- Will you be working again?
- Is creditor protection a big issue for you?
Option #1: Advantages of Rolling to an IRA
1. Gives you the ability to stretch distributions for your beneficiaries
2. Allows for smoother estate planning through beneficiary designations
3. Self-directed IRA can provide more investment choices than those within most 401(k) plans
4. Ability to convert funds to a Roth IRA, if deemed advantageous
5. Freedom to hold annuity investments as part of retirement portfolio
6. Increased flexibility, availability, and control of funds
7. Account consolidation allows easier management and tracking
8. Account portability -- you can easily move IRA from one custodian to another
9. If you rollover your 401(k), you can benefit from access to professional advice
Option #2: Stay Put in the Plan (if or for as long as allowed) or roll to a New Employer's Plan
1. Employer plans provide built-in federal creditor protection
2. You maintain the ability to borrow against your assets (if the company’s plan allows borrowing)
3. Most large employer plans provide access to affordable, group life insurance
4. The “Still Working Exception” (delay manditory distributions until you are fully retired)
5. The “Age-55 exception” (option to tap 401k funds without 10% early-withdrawal penalty)
Option #3: Take a Lump-Sum Distribution and Pay the Taxes Now
1. Special Tax Break -- Net Unrealized Appreciation (NUA) on Distributions of Company Stock
This allows you to take company stock from your qualified plan and pay ordinary income tax on the original cost of the stock rather than on its fair market value at the time of withdrawal. The difference in the value of the company stock from the time it was purchased to the time of distribution is called the net unrealized appreciation (NUA). Provided you withdraw all the funds in your plan, you can then defer the tax on the NUA until you actually sell the stock – at wich time (even if it is the day after the distribution), you pay the 15 percent maximum capital rate on the appreciation only.
 2. Special Tax Break -- 10 Year Averaging The first important rule to qualify for 10 year averaging is you must have been born before 1936. If you meet this criteria, we will be glad to discuss if proceding with that tax break make sense for you.
Technically speaking, it is very easy to roll over a 401(k) or IRA. The important part is understanding all of your options and having someone with experience and focus to advise you on your best choice.
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