The major factor that continues to drive the asset growth of IRAs is rollovers from other qualified plans, as opposed to new contributions. As more workers are participating in defined contribution plans, typically 401(k) plans, and are in defined benefit plans that allow a lump-sum distribution, an increasing number of them are faced with making decisions about what to do with the assets they have earned in these plans when they voluntarily change jobs, are laid off, or retire.
After leaving employment, a worker with a retirement plan balance that is eligible for IRA rollover, typically has three choices for his or her retirement account:
- Leave the money in the current plan. Some employers require that retirement account balances be transferred from the employer plan within a certain time period. Other plans allow an employee to leave the funds in the employer sponsored retirement plan indefinitely. This option will usually not cause any taxation to the employee.
- Cash it out. This simply means to receive the retirement plan balance as a taxable and possibly penalized transaction. This option will allow an employee to do anything they want with the proceeds but will typically come at a very high price. In most cases the distribution will be fully taxable for federal and state income taxes, as well as subject to a 10% federal penalty and any applicable state penalties. We have seen taxes and penalties amount to up to almost 50% of the retirement plan distribution. Typically, Financial and Tax Advisors will recommend that investors do everything possible to NOT cash out their retirement plan.
- Roll it over. Funds can be rolled over to another tax-qualified savings vehicle such as an IRA or another employment-based plan. This simply means that an employee with an employer sponsored retirement plan can transfer the retirement account balance to an IRA or other retirement plan of their choice. This option will also usually not cause any taxation to the employee. An employee can roll their funds into a standard IRA or can choose to utilize the Self-Directed IRA structure for maximum investment flexibility.
For additional information on IRAs please see the section of this website entitled "IRA Rules, Regulations, Restrictions, & Recommendations". In addition, please discuss your options with your tax, legal, and financial advisors. |
