Ryan A. Dunn, CFP®
America's Great Resignation: Is Now the Time to do an IRA Rollover?
Updated: Jun 13, 2022
Businesses of all kinds are having trouble finding workers nowadays. But, one of the most surprising stats for me in the post-COVID economy is the record “high quit rate” – that’s the number of people who are voluntarily leaving their jobs, in most cases to take a better one.
According to the U.S. Bureau of Labor Statistics, nearly 3% of employed workers (4.3 million people), voluntarily left their jobs in the most recent month measured. That’s the highest level we’ve seen since the Bureau began compiling this statistic in 2000. With so many people changing employers these days, it got me thinking: What is happening to those retirement plans?
When changing jobs, you have several options with your retirement account:
1. You can cash it out. 2. Leave it where it is. 3. Transfer it into your new employer's 401(k) plan (if one exists). 4. Roll it over into an individual retirement account (IRA).
For most people, taking a large distribution from a retirement account doesn’t make sense since taxes and other potential penalties will be steep. In most cases, rolling one’s plan into an IRA is the best choice.
Here are some of the most important reasons why:
Flexibility. An IRA rollover can give you for more flexibility to make changes more quickly without the administrative hurdles or delays you typically find in an employer-sponsored 401(k) or 403(b). This includes when tax changes (see SECURE Act or CARES Act) occur.
Control. IRA rollovers allow you to take control of your funds. You can rely on your own personal financial advisor to help you make decisions, rather than a plan administrator who will not know the scope of your retirement plan.
Philanthropy. Qualified charitable distributions (QCDs) can ONLY be made from IRAs. You will lose this tax benefit if your funds remain in a company retirement plan.
Estate Planning. It’s often easier to coordinate your IRA into your overall estate plan than a 401(k). If there are multiple beneficiaries or charitable beneficiaries, those beneficiaries can be managed more efficiently by the financial advisor in an IRA.
More investment choices. Within the IRA you have an entire universe of investment options to choose from. You’re not limited to the menu of funds offered by your company plan.
Convenience. An IRA makes it easier to consolidate (and track performance of) all of your retirement funds in one place. Retirement accounts generally do not break out detailed performance data.
Flexible withholdings. Typically, retirement plans are required to withhold 20% of distributions for federal income taxes. IRAs are not required to do so.
Simplification. RMD planning is simplified when you hold all your assets in a single IRA. When holding funds in multiple plans, you will need to take required distributions from each of those accounts.
Tax Planning. An IRA allows for more significant tax planning. We can implement strategies such as tax-efficient asset location preferences or coordinated cashflow planning.
Service. Ex-employees receive better service and more personal attention from financial advisors than they do from phone representatives at retirement plans who have no understanding of their personal situation.
Are there any immediate tax consequences involved when rolling over from 401(k) to an IRA? No, if you do it correctly. When processing a rollover, you have many different options. The easiest way is to roll it over directly into your IRA. There are other options that will allow you to take direct possession of those funds, but this can lead to potential tax consequences and penalties if not done correctly.
Are there any fees involved for doing a rollover? Typically, no. The 401(k) provider might charge a small fee of $75 to $100 for closing the account, but that’s about it.
Is there a certain time I should consider a rollover? If you’d like to do a rollover, you’ll usually want to wait a month after leaving your original employer. It can take a little time for them to report your separation of service to the retirement account manager.
Do I need to worry about income limits? Many people get confused here. There are no income limits on rollovers. Even if you make several million dollars a year, you can roll over a 401(K) to an IRA. The income limits only apply to future contributions to traditional or Roth IRAs.
Can I roll over to an IRA if I’m still with my current employer? We get this question a lot and generally the answer is no. However, if you employer offers “in-service” rollovers then rolling over is a possibility. It all depends on your company’s plan agreement. We can work with you to review your employer’s Summary Plan Description to see if this strategy makes sense for you.
Conclusion If you or someone close to you has concerns about transferring or rolling over retirement accounts, please don’t hesitate to reach out. We’re happy to help.
RYAN A. DUNN, CFP®, Wealth Manager at Novi Wealth