Thoughtfully Rolling a Workplace Retirement Plan to an IRA

3 Minute Read

When you retire or leave your place of employment, you have the option to leave your money in your company plan, or roll the money to an IRA.

The IRA can provide several benefits including more investment options, professional management, personalized service, and added flexibility of systematic distributions during retirement.  It can also help to create clarity and simplicity by consolidating retirement assets together in one place, incorporated with a comprehensive financial plan.

The process to roll the money from a company plan to an IRA requires thoughtful analysis.  Here are several items to consider to ensure the rollover is done properly, and tax efficiently.

Vesting

First and foremost, make sure your company has your correct vesting amount.  Vesting is your ownership in company contributions and earnings.  Many companies require you to be employed at least half-time for 6 years to be fully vested in the contributions they have made to your account.  Vesting records are many times not accurate, and updated infrequently so be sure your record is correct, and you receive all of the money you are entitled to receive.

After-Tax Contributions

Before the Roth was introduced, employees were able to make after-tax contributions to their retirement accounts.  These after-tax contributions can either go to you in a check, or you can roll them into a Roth IRA.  The Roth IRA will allow tax-free earnings going forward while and you retain the ability to take the contributions out of the Roth at anytime tax and penalty free.

Net Unrealized Appreciation

If you have highly appreciated company stock, you can transfer that stock into a brokerage account instead of an IRA and pay taxes on the basis.  Why would you want do this?  When you sell the stock, the appreciation will be taxed at capital gains rates instead of ordinary income rates, potentially saving significant tax dollars upon sale and distribution.

The Check

Many company plans will send the rollover check directly to you.  When you request the distribution, be sure to indicate you are requesting a “Direct Rollover” and the check to be made payable to “IRA Custodian For the Benefit Of Your Name.”  Ask that the check be sent expedited delivery so the money is out of the investment markets for the shortest time possible.

Avoid Indirect Rollovers

These are instances where the funds are paid out directly to you, fully taxable, and you have 60 days to get the money into another retirement account.  These types of transfers are filled with potential tax and penalty landmines.  Always opt for Direct Transfers and Direct Rollovers when moving retirement money between accounts.  You can always take a cash distribution later, if needed, directly from an IRA.

Age Matters

Finally, the age in which you do the rollover is an important consideration.  If you are between the ages of 55 and 59.5, it could make sense to at least keep some money in the company plan.  Distributions from a company plan are penalty free at age 55 when separated from the company.  For IRAs, distributions prior to age 59.5 incur a 10% penalty.

If you are working past age 70.5, you can delay Required Minimum Distributions (RMDs) from your company plan if you are employed for the entire year through December 31st.  Retire even one day prior, and you are required to take that RMD for the entire year.

Thoughtful planning around rolling money from a company plan to an IRA can truly add value in retirement planning.