In-Service Transfers from Qualified Plans to IRAs

Question:  I have attained age 59 ½ and have the opportunity to withdraw funds from my company 401(k) plan and contribute them to my IRA. Should I do so?

Answer:  Employees who have attained age 59 ½ often have the option under their company sponsored 401(k) or other retirement plan to withdraw plan funds and transfer or roll over the assets to an Individual Retirement Account (“IRA”). Among the factors which should be considered are the following:

  1. Investment Options. If you transfer your 401(k) plan funds to an IRA, you may have more investment options available to you than if the funds remain in your company 401(k) plan. While investment options differ from plan to plan, many 401(k) plans only offer plan participants the choice of investing in a group of mutual funds from one investment institution. If you desire to expand your investment options to include individual issues or a broader array of other investments which are currently unavailable to you, you should consider an IRA rollover.
  2. Investment Fees. Many 401(k) plans negotiate favorable fees with investment institutions. Individual IRA owners may not have as much bargaining power and, therefore, may incur larger investment fees with funds held in an IRA.
  3. Plan Loans. Many 401(k) plans allow participants to borrow from their individual accounts. Although the amount which can be borrowed is subject to statutory limitations and other restrictions, 401(k) plan participants know that they have a means of accessing their retirement plan funds without tax liability. Loans are not permitted from IRAs. A 401(k) plan participant who has a loan or is contemplating borrowing money from the plan, should consider leaving the funds in the plan.
  4. Required Minimum Distributions. Some 401(k) plan participants choose to work past the date when they are required by law to commence distributions from their retirement plans. Generally speaking, distributions from 401(k) plans, IRAs and other retirement plans must commence when a person attains age 73. But a participant who does not own more than 5% of the employer sponsoring the plan and who continues to work for the employer can maintain the participant’s funds in the participant’s 401(k) or other employer-sponsored plan until the participant actually retires. This option is not available for IRA owners for whom IRA distributions must commence generally upon attaining age 73. A participant who wishes to defer required minimum distributions of his or her retirement plan funds should consider maintaining the funds in the company plan.
  5. Creditor Protection. Funds in a 401(k) plan are generally protected from creditors. IRA funds can be protected from creditors but creditor protection is more limited if funds are withdrawn from a 401(k) or other company retirement plan and comingled with traditional IRA funds. Unless a participant creates a separate IRA for 401(k) plan funds transferred or rolled over from an employer plan, maintaining the funds in the company plan may better protect the retirement plan assets from creditors.
  6. Conversion. Many taxpayers contemplate converting traditional IRA funds to Roth IRAs, paying tax on the converted amount and thereby enjoying tax-free distributions from the Roth IRA during lifetime. Family members of a deceased IRA owner whose funds are held in a Roth IRA enjoy the same benefit of avoiding tax on Roth IRA distributions. Moreover, there are no required minimum distributions from Roth IRAs funds during the Roth IRA owner’s lifetime. While a growing number of 401(k) plans are allowing participants to elect the Roth option, not all 401(k) plans do so. If a participant is contemplating a Roth IRA conversion, the transfer of 401(k) plans funds to an IRA may be beneficial.

There are a number of factors to consider in deciding whether to transfer 401(k) and other retirement plan assets to an IRA while still employed by the sponsoring employer. Participants facing this decision should consider that in most cases, this is not an all or nothing proposition. A participant may choose to transfer some funds to an IRA and retain some funds in the company sponsored plan. In all cases, an evaluation of all of the factors should be made.

                                          

Please contact Bruce Bell with any questions at (312) 648-2300 or e-mail at bruce.bell@sfbbg.com.

 

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