Give up a job? Do you have to lengthen, keep, or withdraw your retirement plan?

By Joseph Di Salvo, ChFC, and Marie Madarasz, AIF

We recently had a customer with an old 401 (k) plan notification. That plan was left with a company he quit in 2001 and with which he has not had any contact since. In the following years life was busy! New employment, starting a family, moving, etc. All the good things in a young and growing household. No wonder an old 401 (k) was forgotten. It was left to the former employer because of confusion about what to do with it and some indolence. It was completely forgotten over the decades. The value of the retirement plan continued to grow as the initial investment grew and increased. Where it was originally a small, forgettable amount, it was now over forty thousand dollars!

Marie Madarasz & Joseph DiSalvo

The notification our customer received out of the blue was a service change notice. To find out how we could best advise our client, we phoned the new administrator of the plan, who quickly tried to verify our client. They had little to no information on file to review him. They could send a code to the email they saved. Oops, that old company email address no longer exists! Could he give you the exact date when he started working for the employer in 1996? No, the date our customer had did not match. It quickly became a swamp! They couldn’t verify enough information to speak to us and we couldn’t get the details we needed to help our client make and implement the decision: should they extend, stay, or withdraw? (And by rollover, we mean a direct rollover where the check is payable to the IRA custodian rather than the participant.)

This is a true story and while I am confident we will resolve this for our client, it is a story about what happens when funds in business plans are left unattended. In addition to the many hoops you may have to skip through to get information, there may be additional requirements for a rollover or withdrawal such as: B. the signature of a former employer. Some rules may seem arbitrary and frustrating to a former employee. As Ed Slott says, “The rule of the plan is the rule of the land.”

What should I do with my retirement provision when my employment relationship ends? Well the best advice we can give is: it depends on your individual circumstances.

Keep assets in the business plan

In general, plan assets under ERISA will enjoy state protection for general creditors, while state law will protect the IRAs. If your state offers limited or no bankruptcy protection and you have personal concerns related to misconduct, divorce or bankruptcy issues, or other types of legal proceedings, bankruptcy protection should be considered. IRAs are only granted federal protection in bankruptcy situations up to a current limit of $ 1,362,800, not for other types of judgments.

In the event of a divorce, QDROs (Qualified Domestic Relations Orders) are only available through business plans, not IRAs. Payouts from plans shared by a QDRO are not punishable by early payouts. However, this benefit is lost when these funds are transferred to an IRA.

If you are a non-marital beneficiary, inherited IRAs cannot be converted to Roth IRAs, but corporate inherited plan assets can be converted to Roth IRAs for a designated beneficiary.

If you are of legal age, you may be able to move plan RMDs (Minimum Payouts Required) except “Still Working” when IRA funds are carried over into your new business plan with a few exceptions.

If immediate or short-term access to your funds is required, then you should keep an eye on the 55 year old’s exemption from the 10% penalty. If you are 55 or over when you quit your job but are not yet 59½ and need access to your funds, leave the funds on your plan and make your withdrawals there. The distribution becomes taxable, but without a 10% penalty. If converted to an IRA, withdrawals before the age of 59 ½ years are subject to a 10% early repayment penalty.

For employees of the state and municipal security services, money can be withdrawn without penalty if they left the service in the year of their 50th birthday or older.

And participants in 457 (b) plans are exempt from the 10% early repayment penalty, but once the funds are transferred to an IRA, that 457 (b) plan penalty exemption is lost.

Transfer the plan to an IRA

First and foremost, an IRA rollover would allow the plan participant more flexibility to make changes without the administrative hurdles or delays that plans can introduce, as in our example above!

Rollovers allow plan participants to take control of their funds. An IRA can be a highly flexible and tailored investment vehicle, as opposed to a plan with limited choices. IRA owners can get attention and advice from their personal financial advisor, rather than a customer service representative on 1-800 number who may or may not be able to advise on planning options.

If you are a nonprofit and are at least 70 ½ years old, QCDs or qualified charitable distributions that allow the amount you donate to the charity to be excluded from adjusted gross income, even if you claim the Standard Withholding, can only be from an IRA, not from a company plan.

Transfers to an IRA allow easier creation of the stretch IRA for eligible named beneficiaries under the SECURE Act, as well as greater flexibility in handling the new 10-year rule for unauthorized named beneficiaries. It is not yet known how plan sponsors will deal with these very new topics. Chances are that plans may not want to get caught up in the administrative nightmare of chasing after the beneficiaries of deceased former employees while they make the necessary distributions. Instead, the plans can simply be paid out to the beneficiary in a year or, at best, five years.

If you have valued company stocks, consider distributing the stocks to a taxable account and transferring the remainder of the plan assets to an IRA to take advantage of the more favorable tax treatment of net unrealized appreciation (NUA). If done correctly, only the cost of the share would be taxed upon acquisition through the Plan, and the participant would have access to more favorable withholding tax treatment when the share is eventually sold. Strict rules apply to this – get qualified advice!

The IRA is a great place to consolidate and control the various risks (market risk, cashout risk, tax risk, inflation risk, and longevity risk) that come with a portfolio that will be in distribution mode now or at some point. Effective management and coordination of these risks will best position the IRA owner to maximize their income, improve their investment results, and minimize the amount of tax.

You have more flexibility and control when the funds are in an IRA to implement a partial Roth conversion strategy.

When required minimum distributions are due, IRAs are aggregated to calculate RMDs. An IRA owner can take his / her RMD from any or a combination of his / her own IRAs. Business plans generally require the employee to take their RMD from each plan separately, with the exception of 403 (b) s as RMDs can be taken from any of an individual’s 403 (b) plans.

Bottom line

Former employees have a choice of what to do with their plan funds when they leave an organization. The following must be taken into account: When do you need access to the funds? What kind of control and flexibility do you need over your assets? And will bankruptcy protection be necessary? Make sure to seek qualified advice to ensure that you are choosing the best option for your unique situation.

About the authors: S. Joseph DiSalvo, ChFC and Marie L. Madarasz, AIF

S. Joseph DiSalvo, ChFC and Marie L. Madarasz, AIF, authors of Income for Life, a Guide for Retirees to Generate Income from Savings, specialize in the coordination of retirees’ income, investments, and tax planning. They are members of Ed Slott’s Elite IRA Advisor Group, a prestigious study group that is expanding their knowledge of IRA distribution planning. Both are strong advocates of financial literacy and seek to teach others how to achieve sustainable success and lifelong prosperity. www.IncomeForLifeBook.com

Do you have questions about your taxes, personal finances, and investments? Get answers!

Email Jeffrey Levine, CPA / PFS, Chief Planning Officer at Buckingham Wealth Partners to: AskTheHammer@BuckinghamGroup.com

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