Retiring Soon? Choosing the Wrong Rollover Option Can Create a Ca-TAX-trophy!!

| September 02, 2015

You may have heard news reports about the large retirement boom that is happening all over America. Trillions in retirement plans are in motion and a baby boomer retires every 8 seconds for the next several years. It’s pretty dramatic.

Those are the sensational news headlines, but let’s get past the hoopla and get down to your level; what about you? See, when you retire and leave the company, you have to make a decision on what to do with your retirement plan. Think of it like this, your plan balance needs a destination and you direct where it goes. Have you looked into what your options are? If you spend 30-40 years working and saving for retirement, wouldn’t it be reasonable to put some time into learning about your options? Consider also, if you pick the wrong option or make a mistake, it can cause serious tax problems. This is because the money in these plans are tax deferred balances and one mistake can trigger huge taxes!! You know the old saying, it’s easier to avoid a mistake than it is to solve one – especially when it comes to taxes!

The following are some common options you may be faced with when you retire with an employer sponsored retirement plan:

  1. The first option is to transfer (sometimes referred to as a direct rollover) the money to an IRA. This is probably the most used option. This is where you transfer the plan balance to an IRA in the form of a trustee to trustee transfer. A trustee to trustee transfer avoids taxes and penalties. There are generally more investment options within an IRA than a company plan. Another reason to roll the money to an IRA is to preserve the future use of the Inherited IRA for your beneficiaries. Even though employer plans are allowed by law to offer the inherited IRA feature, not all do – that’s not the business they’re in.
  2. Another option is to leave it at the company plan – You can do this, but you won’t get the same attention as before now that you are retired. Plus, future beneficiary and estate planning is more difficult with a company plan than with an IRA.
  3. You can transfer it to a new company plan – this may be an option if you change jobs. If your new employer plan allows it, you can roll your old plan into the new employer plan.
  4. Lump-sum distribution – Really, there is no good reason to withdraw your lump sum and pay tax on it all at once unless you just feel real patriotic. Ok, there is one real good exception and that’s for Net Unrealized Appreciation or NUA. NUA allows you to withdraw common stock from your employer retirement plan and pay long term capital gains rates instead of ordinary income tax on the appreciation. By the way, if you have common stock in your employer retirement plan, don’t roll that plan to an IRA until you check into NUA. NUA is an excellent tax strategy for highly appreciated common stock in an employer sponsored retirement plan; but once you move the money to an IRA you’ve killed the NUA strategy and it can never be used again! You have to use NUA before you roll the money. The rules are very strict and you can’t fix it if you screw it up, so don’t try this at home, call us, we have extensive experience using Net Unrealized Appreciation.
  5. Next is the Roth IRA Conversion – You’re allowed to transfer your company plan to a Roth IRA. Technically this is converting it to a Roth IRA. Since a Roth conversion can be done at any time, it is not necessary to choose this option now.

Remember, you only retire once so do your homework. Here at Piershale Financial Group, we have extensive experience in retirement plan options. We stay current on tax law and are well trained in retirement planning. If you are facing retirement and need help, pick up the phone and call us, we’d love to hear from you! Thank you for reading!

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.