A 2014 study from Cogent Reports concluded that over 50% of affluent investors with a balance in a former employer-sponsored retirement plan expect to roll their money into an IRA within the next 12 months. This report continues by saying that an estimated $382 billion will be rolled over in 2015. On average, households with IRA rollovers have $260,000 in financial assets and the average value of those IRAs is $87,500.
An IRA (Individual Retirement Arrangement) rollover involves moving assets from one retirement account (i.e. 401(k), 403(b), Governmental 457(b), profit-sharing plan) to an IRA. When you roll over a retirement plan you do not have to pay taxes until you make distributions. Generally, IRA rollovers are performed once an individual separates from service from their current employer. Retirement is typically the trigging event for an IRA rollover. However, IRA rollovers can be performed if an individual has left their former employer and is seeking new employment.
Keep in mind; there is an additional way to rollover your retirement plan assets into an IRA by way of an "in-service withdrawal". Typically, retirement plans allow for in-service withdrawals to be made after the age of 59 ½ and before a triggering event like retirement to avoid the early withdrawal penalty of 10%.
Beginning in 2015, the IRS implemented the IRA one-rollover-per-year rule. This rule states that an individual is limited to one IRA rollover per year, regardless of the number of IRA accounts. However, this rule does not apply to the following:
- Trustee-to-trustee transfers between IRAs are not limited
- Rollovers from traditional to Roth IRAs ("conversions") are not limited
An IRA is a great retirement planning vehicle where your contributions may be tax deductible and grow tax-deferred to provide you with financial security. The IRA contribution limit does not apply to rollover contributions. An individual has to have earned income to contribute to an IRA and amounts from an IRA are not taxed until distributed. You cannot make regular contributions to a traditional IRA in the year you reach 70 ½ and older. Because when you turn 70 ½ you are subject to Required Minimum Distributions (RMDs). In other words, you cannot defer the taxes on your IRA forever. You have a silent built-in partner within your IRA and that partner is the IRS. Therefore, you have to start taking withdrawals from your IRA, Simple IRA, Sep IRA or retirement plans when you reach the age of 70 ½. If you do not take your RMDs by the required deadline, the amount not withdrawn is taxed at 50%. You are free to withdraw more than the minimum required amount and the formula to calculate the RMD is confusing but it is based on the IRS life expectancy tables.
Once you roll over your retirement plan into an IRA you have more flexibility from a tax standpoint to take distributions. Withdrawals from an IRA before reaching the age of 59 ½ are called "premature" distributions. Individuals are subject to an additional 10% early withdrawal tax (unless an exception applies) plus their personal tax rate. For example, an exception applies for distributions to cover qualified higher education expenses.
Why Rollover your Retirement Assets into an IRA?
The main reason investor's rollover their retirement asset into an IRA is:
- The fees with an IRA are generally lower than an 401k
- IRAs have more Investing options
Fees within a 401k typically fall within 3 categories - plan administration fees, investment fees and individual service fees. Remember that all services have a fee and the more financial services provided the higher the fee. The total fee needs to be considered in making an investment decision but it should not be the driving factor. Cheaper is not necessarily better. If price was the only factor to consider, everyone would be driving a Nissan.
Rolling over your retirement assets into an IRA provides more investment choices. This is extremely important because my clients are allowed to participate in tactical portfolio management. In my previous article, There is a Better Way! - Why No One Talks About the Stock Market the Right Way explains in detail the benefits of this type of investment management. With 2016 being the worst start to the stock market ever there is a solution through tactical portfolio management to protect your investment portfolio principal from life changing losses and grow it at the same time.
Article originally posted on PaladinRegistry.com.
About the Author: Blake Fambrough Financial Advisor with Dubots Capital Management attended Texas Tech University and received a B.B.A. in Finance and a M.S. in Personal Financial Planning. In addition, Blake holds the Certified Financial Planner® designation. He has been working in the financial services industry since 2004. He is a member of the Lake Elsinore Rotary Club. Blake with his wife Christina and their daughter live in the Lake Elsinore area and enjoy volunteering their time to their local church. Follow Blake on Twitter @Fambro1