Moving to an IRA

Approaching retirement? What you do with your retirement account in the years leading up to retirement could affect your financial well-being for years to come. One option to consider is rolling over your money to an IRA.

 

Depending on the circumstances, you may be able to transfer the money directly from your 401(k) to an IRA. In other cases, your employer will send you a check for the entire amount. Then it becomes your responsibility to redeposit the funds into your IRA.

 

There are several benefits to an IRA. IRAs typically offer more flexibility and investment options than 401(k)s. Many financial services companies, including registered investment advisors, banks, and mutual fund companies, offer IRAs. And if you have had multiple 401(k) plans through multiple employers, you can consolidate them into a single account.

 

With an IRA, you typically can get access to your funds when you want, though tax rules still apply, and you have greater control of your saved money.

 

You can set up any number of IRAs and designate one beneficiary for each one. But with a 401(k), you are typically allowed to designate only one beneficiary for your account. That means, from an estate-planning perspective, an IRA may offer more flexibility.

 

You may want to use part of your IRA assets to buy an immediate annuity. The annuity option generally pays you a fixed amount throughout your life, says Gal Wettstein, a senior research economist at the Center for Retirement Research at Boston College. Note that a federal law enacted in 2019 generally lets 401(k) plans provide annuity income options too, but some plans may not offer the option—or may not offer it yet.

 

There are also some disadvantages to an IRA. For instance, you’ll need to pay attention to specific time windows for completing the rollover, and if you miss them, you’ll have to pay the tax consequence.

 

D’Unger says some 401(k) plans he’s worked with are “incredibly flexible” and generally let you do what you want, when you want. Some plans won’t let you keep your 401(k) account in place once you retire or otherwise separate from service, but other plans may let you make partial or systematic withdrawals. In brief, it pays to be familiar with all of your plan’s rules and how they work, he says.

 

Mind the Rules

If you plan to move your money to an IRA, be sure to follow the proper procedure. For example, if your plan sends you a lump- sum check, make sure that the check is not made payable solely to you. If it is, you could be taxed on the entire amount, including the 20 percent that your employer typically withholds for taxes.

 

To avoid such complications, ask that the check be made payable to your financial institution for your benefit, Wertheim says. Technically, the check may be made payable to the custodian or trustee that oversees your IRA, using the initials FBO (meaning for the benefit of). For instance, a check might be made payable to “Trustee of Plan X, for the benefit of Alice Smith” or “Institution Z, FBO Alice Smith’s IRA.”

 

Don’t sign or cash the check. Instead, forward it to your IRA or new employer’s plan. It’s a good idea to consult your IRA provider or new retirement plan to see what procedures are required in such cases. The point is to avoid immediate tax consequences, thus allowing your money to keep growing on a tax-free basis until you begin withdrawals.

 

Whether your plan sends the money directly to your IRA or sends you a check with an FBO, as described previously, it’s considered a direct rollover and no immediate tax consequences will ensue. Wertheim says she recommends direct rollovers “because there’s less room for errors.”

Check with your 401(k) plan provider and your IRA to be sure you are taking the right steps in the right order.

 

Middle of the Road

Another option is to move some of your money from your 401(k) to an IRA and leave the rest of the money in the plan. This means more recordkeeping for you but still may suit your current circumstances.

You might also consider leaving your nest egg inside your 401(k) temporarily, until you make a final decision. In other words, there’s no need to rush.

 

Take your time to explore IRA options, comparing features such as investment options and fees. For help with exploring your options, contact our Participant Success Center at (800) 394-6807 or retirement.concierage@apadvsiors.com or schedule a one-on-one meeting HERE. 

 

 

Source: CAPTrust/Broadridge Investor Communication Solutions, Inc.