By Erich Stroupe, CFP®

Managing-Retirement-Plans-Knowing-Your-Options-feature-bbt-perspectives

Every day we speak with clients who have a number of retirement accounts with former employers as well as individual retirement accounts (IRAs). In fact, a Bureau of Labor Statistics news release from March 2015 reported workers hold on average 11.7 different jobs by age 48. Addressing what we should do with our retirement accounts is not usually our highest priority when life changes occur. For many of us, it’s easy to start an account and leave it as is while we move on in our careers and lives. Not surprisingly, after a few years (or decades) the accounts accumulate.

Yet, if left alone, retirement plans can become financial garages – where accounts are stored, not managed. Knowing your options for managing these accounts is critical to successful retirement planning. Here are some considerations for a little financial spring-cleaning:

Liquidating Your Account

Liquidating your account may be necessary if you need funds immediately, but it has some significant downsides. Few readers would likely pursue this option, but it may be valuable to share the information with your children or grandchildren. The following are some of the advantages and disadvantages of this approach:

  • Liquidating provides immediate access to funds, if no other resources are available.
  • Taxes and penalties will diminish the balance. Distributions are typically taxed as ordinary income, and a 10-percent penalty may apply (depending on your age).
  • One of the retirement plan’s best attributes – future tax-deferred growth – is foregone for amounts distributed:
    – For example, if you leave your current job with $10,000 in your employer’s plan and your account grows by an average rate of return of 6 percent per year, your original $10,000 nest egg will increase to more than $32,000 after 20 years (and you will pay no taxes on that growth during the 20-year period).

Transferring Assets to a New Employer Plan

Transferring assets to a plan with your new employer may provide some benefits that IRAs typically do not. You will want to understand your new employer’s plan before you decide whether it is your best option:

  • If you have concerns about asset security, employer-sponsored retirement plans generally offer greater creditor protection than IRAs.
  • The new employer’s plan may offer loan provisions. A plan may allow participants to borrow as much as 50 percent of the account’s balance.
  • An employer plan may offer the option to delay required minimum distributions (RMDs) for those who plan to work beyond age 70½. After this age, distributions from that plan can be delayed until separation from service, whereas RMDs from an IRA must begin regardless of employment status.

Leaving Assets in Your Former Employer Plan

Leaving your assets in your former employer’s plan may be a worthwhile option if you’re happy with plan performance and the plan has potentially valuable benefits. Some of the benefits include:

  • An employer plan may provide access to higher-quality fund managers at a lower cost than what is available to an individual investor in a self-directed account.
  • If the plan allows, participants can take penalty-free distributions upon reaching age 55 and separation from service. Typically, there is a 10-percent penalty for distributions prior to age 59 ½, unless the participant commits to a series of substantially equal periodic payments.
  • Distributions of shares of employer common stock may qualify for special tax treatment, which may be more favorable than typical distributions.

Rollover Assets to an IRA

A rollover allows you to select and use your own financial professional to review your investments and make adjustments based on your financial strategy. Generally, IRAs have more investment choices than employer plans:

  • A direct rollover from the employer-sponsored plan to an IRA can greatly increase the variety and quality of investment choices. Employer-sponsored plans usually offer basic- or limited-investment options, which make account diversification difficult.
  • Consolidation of accounts can simplify the investment management and monitoring processes. Having your investments in one place can help prevent inefficiencies in the allocation of your assets. Assets are harder to manage when scattered among multiple accounts.
  • IRAs may provide greater distribution flexibility for beneficiaries than an employer-sponsored retirement plan.
    – For example, an IRA provides a non-spouse beneficiary the option to “stretch” required distributions over the course of the beneficiary’s life expectancy. Employer plans often require a beneficiary to distribute the entire balance no later than five years from the date the account was inherited.

Financial spring-cleaning can be tough, because each retirement account option has advantages and disadvantages. The right decision for one individual may be different for another. Given the complexities of retirement planning, we recommend you work closely with your financial advisor and tax professional to consider all the variables and make a decision that best fits your needs.

By Erich Stroupe, CFP®

Managing-Retirement-Plans-Knowing-Your-Options-feature-bbt-perspectives

Every day we speak with clients who have a number of retirement accounts with former employers as well as individual retirement accounts (IRAs). In fact, a Bureau of Labor Statistics news release from March 2015 reported workers hold on average 11.7 different jobs by age 48. Addressing what we should do with our retirement accounts is not usually our highest priority when life changes occur. For many of us, it’s easy to start an account and leave it as is while we move on in our careers and lives. Not surprisingly, after a few years (or decades) the accounts accumulate.

Yet, if left alone, retirement plans can become financial garages – where accounts are stored, not managed. Knowing your options for managing these accounts is critical to successful retirement planning. Here are some considerations for a little financial spring-cleaning:

Liquidating Your Account

Liquidating your account may be necessary if you need funds immediately, but it has some significant downsides. Few readers would likely pursue this option, but it may be valuable to share the information with your children or grandchildren. The following are some of the advantages and disadvantages of this approach:

  • Liquidating provides immediate access to funds, if no other resources are available.
  • Taxes and penalties will diminish the balance. Distributions are typically taxed as ordinary income, and a 10-percent penalty may apply (depending on your age).
  • One of the retirement plan’s best attributes – future tax-deferred growth – is foregone for amounts distributed:
    – For example, if you leave your current job with $10,000 in your employer’s plan and your account grows by an average rate of return of 6 percent per year, your original $10,000 nest egg will increase to more than $32,000 after 20 years (and you will pay no taxes on that growth during the 20-year period).
Transferring Assets to a New Employer Plan

Transferring assets to a plan with your new employer may provide some benefits that IRAs typically do not. You will want to understand your new employer’s plan before you decide whether it is your best option:

  • If you have concerns about asset security, employer-sponsored retirement plans generally offer greater creditor protection than IRAs.
  • The new employer’s plan may offer loan provisions. A plan may allow participants to borrow as much as 50 percent of the account’s balance.
  • An employer plan may offer the option to delay required minimum distributions (RMDs) for those who plan to work beyond age 70½. After this age, distributions from that plan can be delayed until separation from service, whereas RMDs from an IRA must begin regardless of employment status.

Leaving Assets in Your Former Employer Plan

Leaving your assets in your former employer’s plan may be a worthwhile option if you’re happy with plan performance and the plan has potentially valuable benefits. Some of the benefits include:

  • An employer plan may provide access to higher-quality fund managers at a lower cost than what is available to an individual investor in a self-directed account.
  • If the plan allows, participants can take penalty-free distributions upon reaching age 55 and separation from service. Typically, there is a 10-percent penalty for distributions prior to age 59 ½, unless the participant commits to a series of substantially equal periodic payments.
  • Distributions of shares of employer common stock may qualify for special tax treatment, which may be more favorable than typical distributions.
Rollover Assets to an IRA

A rollover allows you to select and use your own financial professional to review your investments and make adjustments based on your financial strategy. Generally, IRAs have more investment choices than employer plans:

  • A direct rollover from the employer-sponsored plan to an IRA can greatly increase the variety and quality of investment choices. Employer-sponsored plans usually offer basic- or limited-investment options, which make account diversification difficult.
  • Consolidation of accounts can simplify the investment management and monitoring processes. Having your investments in one place can help prevent inefficiencies in the allocation of your assets. Assets are harder to manage when scattered among multiple accounts.
  • IRAs may provide greater distribution flexibility for beneficiaries than an employer-sponsored retirement plan.
    – For example, an IRA provides a non-spouse beneficiary the option to “stretch” required distributions over the course of the beneficiary’s life expectancy. Employer plans often require a beneficiary to distribute the entire balance no later than five years from the date the account was inherited.

Financial spring-cleaning can be tough, because each retirement account option has advantages and disadvantages. The right decision for one individual may be different for another. Given the complexities of retirement planning, we recommend you work closely with your financial advisor and tax professional to consider all the variables and make a decision that best fits your needs.

About the Author

Erich K. Stroupe

Erich K. Stroupe

Assistant Vice President, Financial Planning Strategist

Erich has more than 14 years of experience in financial services. He earned an MBA from East Carolina University and a bachelor’s degree from the University of North Carolina at Chapel Hill.