At retirement soon leave 401k with the employer or transfer the balance into a Traditional IRA?

Submitted by Jeffry Sannes on Tue, 2019-07-09 20:17

An investment client, soon to retire, was planning to transfer her employer 401k plan balance into an IRA professionally managed on a fee-basis.

However, at a recent company meeting a company spokes person urged the retirees to leave their accounts in the company 401k.

Now the investment client is confused as to what to do.

I phoned in to Ed Slott and Company and asked Glenda if Ed Slott has any resources, articles, books, etc that gives guidance on the retirement decision to leave the balance in the 401k or transfer to an IRA.

Glenda said the best thing was to request an answr in the IRA Discussion Fourm.

Please advise as to resources.



Submitted by Bruce Steiner on Thu, 2019-07-11 22:00

  • Many plans don’t allow beneficiaries to take advantage of the stretch.  Before the Pension Protection Act, many people rolled their benefits over into an IRA at retirement so their beneficiaries could take advantage of the stretch.  Under the Pension Protection Act, this is no longer an issue.
  • Depending on the investment choices, it may be better to roll the benefits over, or it may be better to leave them in the plan.  Some plans, especially with larger employers or with employers who have a sophisticated work force, have good investment choices, in which case it may make sense to leave the money in the plan.  However, some plans, particularly smaller companies where the work force is not sophisticated, have poor investment choices, in which case it would make more sense to roll the money over into an IRA.
  • Even if the plan has good investment choices, an IRA offers virtually unlimited investment choices.  Some people prefer the investment flexibility of the IRA.  However, the virtually unlimited investment choice can be a double edged sword since it exposes the retiree to predators.  Other people are satisfied with the investment choices in the plan.
  • In many states, rollover IRAs are protected against creditors.  However, in a few states, they may not be.  Someone in such a state who’s concerned about creditors may prefer to leave the money in the plan.
  • Bruce Steiner, attorney

Submitted by Alan - IRA critic on Thu, 2019-07-11 23:36

  • While leaving the assets in the qualified plan is beneficial is some cases, particularly if creditor protection is an issue in your state, there are two situations where the qualified plan might be a disadvantage.
  • A qualified plan may include more restrictive conditions than the IRS requires, while IRA contracts rarely do. These restrictions might include distribution restrictions for partial distributions, and under ERISA beneficiary restrictions for married participants. Some plans such as the TSP will not allow use of RMD Table II if married to a spouse more than 10 years younger, forcing out a larger RMD.  Should you mess up and not not name a beneficiary for a single participant, the estate will inherit and your beneficiary will end up with a lump sum distribution. Conversely, if this same thing happens in an IRA, the executor can still assign the inherited IRA to the estate beneficiaries and at least get a 5 year stretch (or greater for deaths after RBD) out of it.
  • Be aware of appreciated employer shares and the NUA potential they may have if distributed to a taxable brokerage account. If such shares are rolled to an IRA, NUA is lost.
  • An important factor is if you DO elect an IRA rollover, what custodian will you use and what investments will you purchase. If you roll it to a bank and they sell you a high commission annuity, you would likely have been better off leaving the assets in the employer plan. 
  • With all these potential factors that apply uniquely to each retiree, the pros and cons must be weighed by each retiree. Historically, brokers and financial planners always pushed for the IRA rollover to get better control over the retirement plan and currently the debates over the fiduciary rule are trending in the direction of greater scrutiny by the DOL or SEC over the advice given to retirees.

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