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Factors to consider when rolling over employer retirement savings plans

Saving & Investing
Factors to consider when rolling over employer retirement savings plans

There are many factors to consider when deciding whether to roll over a distribution from a 401(k), 403(b), or governmental 457(b) plan1, and where your rollover dollars should go if you decide to make a rollover.

When considering rolling over your employer retirement savings plan, always do the following three things:

  1. Ask about the possible surrender charges that may be imposed by your existing employer plan, or new surrender charges that your IRA or new plan may impose.
  2. Compare investment fees and expenses charged by your IRA or new plan (and investment funds) with those charged by your existing employer plan (if any).
  3. Understand any features, rights and guarantees you may be giving up, or gaining, by moving your funds to an IRA or new employer plan.

The table below will help you weigh your options when it comes to rolling over your funds to an IRA or leaving your funds in your original employer savings plan or rolling over to a new employer plan.

Rolling over funds to an IRA vs. using an employer plan

Roll funds over to an IRA

Leave funds in original employer plan or roll over to new employer plan

Investment options

  • Often provides broader range of investment options
  • Can diversify investments with an unlimited number of IRAs2
  • Menu of investment options typically limited (usually mutual funds)3
  • There may be certain investment opportunities in plan that cannot be replicated in IRA
  • You may be satisfied by low-cost institutional funds available in your particular plan, and therefore not regard IRA’s broader array of investments as an important factor

Fees and expenses

  • Investment-related expenses may include sales loads, commissions, expenses of any mutual fund investments, investment advisory fees
  • Account fees may include administrative, account setup, and custodial fees
  • Investment-related expenses may include sales loads, commissions, expenses of any mutual fund investments, investment advisory fees
  • Plan fees may include plan administrative fees (recordkeeping, compliance, trustee fees); fees for services such as loans
  • Employers may pay some or all of plan’s administrative expenses

Ability to change trustees/custodians

  • Can freely move your IRA dollars among different IRA trustees/custodians
  • Flexibility to change trustees/custodians as often as you want if dissatisfied with investment performance or customer service (no limit on how many direct, trustee-to-trustee IRA transfers you can do in a year)4
  • Cannot move funds to different trustee/custodian until you receive an eligible rollover distribution from the plan

Distribution flexibility

  • Almost unlimited distribution flexibility for you and your beneficiaries
  • Distribution options available to you and your beneficiaries typically limited

Annuity option

  • Individual Retirement Annuities generally available from insurance companies
  • Gender-based pricing — generally more favorable to women
  • Employer plans may but don’t have to provide annuity option
  • Unisex pricing — generally more favorable to men
  • May have less expensive group annuities

Roth required minimum distributions

  • No required distributions during your lifetime (beneficiaries must take distributions after your death)
  • Required at age 70½ or actual retirement, if later (unless 5% owner)
  • Can avoid lifetime distributions by rolling Roth account to a Roth IRA

Non-Roth required minimum distributions

  • Required after reaching age 70½
  • Can postpone required distributions from current employer’s plan past age 70½ to actual retirement unless 5% owner; may be advantageous if you plan to work into your 70s

Loans

  • Loans not available
  • Employer plans may but don’t have to allow loans

Creditor protection

  • Amounts rolled over to IRA from employer plan generally protected in full under federal law in event of bankruptcy
  • Creditor protection outside of bankruptcy generally depends on state law
  • Generally unlimited protection from creditors, both inside and outside of bankruptcy5

10% early distribution penalty (does not apply to rollovers or Roth conversions)

  • Penalty generally applies to distributions before age 59½ (unless exception applies)
  • IRAs (but not employer plans) offer exception for qualified first-time homebuyers ($10,000 lifetime cap) and qualified higher-education expenses
  • Penalty generally applies to distributions before age 59½ (unless exception applies)
  • Penalty does not apply if you receive distribution as a result of separation from service in year you reach age 55 or later (age 50 for qualified public safety employees)

Other services

  • IRA providers offer different levels of service, which may include full brokerage service, investment advice, distribution planning, and access to securities execution online
  • Employer plans may provide access to investment advice, planning tools, telephone help lines, educational materials, and workshops

Rollover of after-tax dollars

  • After-tax (nontaxable) dollars rolled over to IRA may not be rolled back into employer plan, only to other IRAs
  • After-tax (nontaxable) dollars can be rolled over to other employer plans or IRAs

Conversion of pre-tax and after-tax dollars to Roth

  • Can convert all or part of traditional IRA to Roth IRA at any time
  • Plan may but doesn’t have to allow in-plan Roth conversions
  • Can roll over (i.e., convert) non-Roth funds to a Roth IRA

Five-year holding period for tax-free qualified Roth distributions

  • Starts first day of year you first contribute to any Roth IRA (including conversion)
  • Nonqualified Roth funds rolled over from employer plan must satisfy Roth IRA’s 5-year holding period
  • Starts first day of plan year you make Roth contributions to that particular plan
  • If Roth funds are rolled over to new employer’s plan, 5-year holding period carries over and applies to all funds in new plan; may enable earlier tax-free qualified distributions from new plan

Employer stock

  • Appreciation in employer stock transferred in-kind to IRA taxed as ordinary income when distributed from IRA
  • Appreciated employer stock may be eligible for favorable long-term capital gains tax treatment when distributed from the plan and later sold (net unrealized appreciation, or NUA rules)
  • For some participants, risk of holding too much employer stock may make it advisable to liquidate holdings and roll over proceeds to IRA even if it means losing favorable tax treatment

Need help making important financial decisions?

Rollover ira handwritten in a notepad. Retirement.; Shutterstock ID 1154608705; CUID Number (on creative Hub): 021780; Organization Name: Arsenal CU; Usage (Sales, Marketing, Internal, Other): Marketing

As a member of Arsenal Credit Union you have access to David Weis, our knowledgeable financial advisor available through our broker-dealer CUSO Financial Services, LP (CFS)*. Click here to learn more about David and the services he offers.

More 401(k) resources

*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor.  Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.

Before deciding whether to retain assets in an employer sponsored plan or roll over to an IRA, an investor should consider various factors, including, but not limited to: investment options, fees and expenses, services, withdrawal penalties, protection from creditors and legal judgments, required minimum distributions and possession of employer stock.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2019.

1 This table considers the options for eligible rollover distributions. You cannot roll over hardship withdrawals, required minimum distributions, substantially equal periodic payments, corrective distributions, and certain other payments. Special rules may apply if you are the beneficiary of a plan participant.

2, 4 You can make only one indirect (60-day) rollover from one IRA to another IRA in any 12-month period, regardless of how many IRAs (including traditional, Roth, SEP, and SIMPLE IRAs) you own. There are no limits to the number of trustee-to-trustee (direct) transfers you can make.

Diversification alone cannot guarantee a profit or ensure against the possibility of loss. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any strategy will be successful.

3Before investing in a mutual fund, carefully consider the investment objectives, risks, charges, and expenses of the fund. This information can be found in the prospectus, which can be obtained from the fund. Read it carefully before investing.

5 Federal protection from creditors outside bankruptcy applies to plans covered by the “anti-assignment” provisions of the Employee Retirement Income Security Act of 1974 (ERISA). Individual (solo) 401(k) plans, governmental plans, SEP and SIMPLE IRA plans, and certain church plans are generally not covered by these ERISA provisions.

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