Important!! Changes in Your Retirement Savings and Investment Options

For years, the government and private industry have been trying to hand off responsibility to individuals for their own retirement planning. The shift that was enacted from defined benefit pension plans to defined contribution plans (401(k), 403(b), etc.) was a significant step in this direction, and now Congress has taken the next step.

You can now move your retirement account nearly anywhere you want. The Economic Growth and Tax Relief Act of 2001 permits you to move your retirement money almost anywhere and back again! And the big news is that you can do this while you are still working. Of course, there are some restrictions but in general it is fairly straightforward. Here is how it works:

The new law says that your employer must provide you with the opportunity to roll over your retirement money from your employer-sponsored plan to any other plan you choose. For example, you can now roll over your 403(b) retirement plan to an individual retirement account with any firm you choose. You can also execute another rollover from that same IRA into a 401(k) plan at any time in the future if you so choose. You can roll over your assets from a 401(k) plan to a 403(b) plan, or to a Federal or State government deferred compensation plan, as well as to an individual retirement account (IRA). The portability of your retirement money is almost unlimited.

What are the advantages of this new legislation?

  1. Better management of your money. Unfortunately, many employees have been stuck for years in retirement plans that have not been administered or managed particularly well. Now, if you don’t like the options your company has, you can move your assets. And you don’t have to change jobs or retire to do so.
  2. Less Cost – Higher Earnings – In many cases, employees will be able to lower the cost of investing significantly, and keep more of the earnings from their investments. Up until this tax law change, if your money was held in a 403(b) plan, you were restricted to investing in options sponsored only by insurance companies or mutual funds. In many cases, these options had hidden costs that plan participants paid, thereby lowering the value of their overall retirement nest egg.
  3. More Investment Choices – If you roll over your money to your individual retirement account, you can begin purchasing individual stocks or bonds and avoid some of the inherent problems of mutual funds (such as higher investment expenses or poor timing of cash flows in and out of the funds).
  4. Better for Your Spouse – Your employer’s plan probably requires your surviving spouse to distribute the money within five years. An IRA has no such requirement.
  5. Easier – An IRA is easier for most people to administer and track than your employer-sponsored plan because the mutual funds in that plan are often not publicly traded and information about them is not easily obtained.

What are the potential disadvantages of a rollover?

  1. Too Many Choices – Once you’ve moved your money into an IRA, you will have lots of investment options, far more than the selection of mutual fund companies that your employer offers. We actually think this is an advantage but it can be a little daunting at first.
  2. No Loans Against Your Assets – You will not be able to borrow money from your IRA. Employer-sponsored retirement plans sometimes offer you the opportunity to borrow money against your assets (limited to $50,000 payable in five years). We at BWFA do not recommend taking loans from your retirement plan under most circumstances so we don’t see this as a disadvantage.
  3. Over 66 and Still Working? – If you are, you give up lump sum distribution treatment. This is not a significant disadvantage.
  4. Holding Employer Stock? – In some limited circumstances, you might give up capital gains treatment if you hold your company’s stock in your retirement plan. This has important tax consequences, and you should seek the advice of an objective advisor.

What should you know before you execute a rollover?

  1. Do you have pre-taxed contributions in the retirement account? You may roll over these already-taxed contributions, but the new trustee must be prepared to account separately for the after-tax rollover and the associated earnings. Before you authorize the rollover, you need to make sure that the new trustee will accept after-tax money.
  2. Will you want to move the money back into an employer-sponsored retirement plan (such as a 401(k))? If so, you must keep this money segregated in a “rollover” IRA account. Do not mix (“commingle”) the money with other regular IRA money.

In many cases, there will be significant advantages to moving money from an employer-sponsored plan to an IRA. By enacting this legislation, the government has taken a significant step toward giving individuals more control over how their retirement savings are invested, an important and welcome gain in autonomy for any employee. But, as in many other situations in life, greater control and better options mean that it is more critical than ever to make sure you are doing the right thing.

There is no substitute for objective professional advice when it comes to something as important as your retirement and the assets that will fund it. Feel free to contact your BWFA advisor if you have any questions about this topic.