To Roll or Not Roll Your IRA? By Lewis J. Walker, CFP(R)

You changed jobs and left your old 401(K) or other plan at a previous employer. Or you are retiring and you have assets in a company plan. Should you roll those assets to a IRA?

With any financial decision, the answer depends on your particular financial circumstance. Are there after-tax contributions in the mix? You should know the balance of after-tax contributions (money contributed and not tax-deducted). That may be rolled into a Roth IRA tax-free. A Roth IRA does not require a required mandatory distribution (RMD) at age 70 ½ and money can continue to grow free of tax.

Do you have company stock in a company plan? For long term employees of successful and growing companies that can be significant. If so, understand the NUA—net unrealized appreciation—rule. If you are over 59 ½, you may take an in-kind distribution of the stock and move it to a personal brokerage account. The cost basis of the stock, what you paid for it over time, is taxable to you at the time of transfer as ordinary income. When you sell the stock, the “net unrealized appreciation” or NUA, the difference between the cost basis and current market value, is taxed at long term capital gains rates.

That is a key tax break. The top rate for long term capital gains is 20% versus 39.6% at the top bracket on ordinary income. NUA is not subject to the 3.8% Medicare surtax on net investment income. Be sure that you have the money outside of your retirement plan to pay the tax applicable to the year of distribution. Once you own the stock personally, you don’t have to sell it. You may retain it for dividend income or as a bequest to heirs or charity. Once shares are outside of the retirement plan, they are not subject to RMD rules.

Are you in your 50s with your job outlook cloudy along with finances? If you are a participant in a company 401(K) plan and leave employment with that firm during or after the year you turn age 55, there is no 10% withdrawal penalty applied if you are under age 59 ½. The penalty-free age limit is even lower, age 50, for retiring police, firefighters, and medics. This break does not apply to IRAs. If you may need retirement funds prior to 59 ½, that’s a reason not to roll to an IRA.

There are other considerations. Investment options not available in a 401(K) plan may be attractive, such as alternative investments or “high conviction” stock or bond portfolios run by individual managers outside of a mutual fund format. Many investments require minimum initial investment amounts to participate and by combining old plan balances into a single amount you may do so.

But let’s say you are participating in a 401(K), 403(b), or 457 plan, and you are over age 59 ½, but still working. There is an investment that you would like to make that is not available in your plan. If your company plan allows it, you may be able to do an “in-service distribution.” You may be able to reallocate a portion of your plan tax-free into an IRA and make the outside investment. This must be a custodian-to-custodian transfer. Do not take possession of the funds and then move them to the IRA.

In addition to the issue of company stock and perhaps needing funds prior to age 59 1/2, there may be other reasons to leave the assets in the company plan. Does the current plan offer similar or lower cost investment options comparable to those touted in the IRA? Are there fees, commissions, or other expenses that must be compared to your old plan before you make a change? Be wary of “free” or “no fee” claims.

Will you work past age 70 1/2? Required Minimum Distributions (RMDs) are required from IRAs and company plans at age 70 1/2, however, an employee still working after 70 1/2 generally does not have to take an RMD until they cease working. Is creditor protection an issue? Federal law in general extends unlimited protection to plans but IRA assets are shielded in bankruptcy only. Tax and legal matters should be discussed with qualified counsel.

What investment policy will be followed? How much risk can you take vis-à-vis cash flow needs and rate of return targets?

Important questions require informed answers before you roll!

Lewis Walker is President of Walker Capital Management, LLC. Certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative of SFA which is otherwise unaffiliated with Walker Capital Management, LLC. lewisw@theinvestmentcoach.com