A ten-year bull market in U.S. equities, low unemployment, and an increase in the savings rate have led to dramatic increases in 401(k) balances for many American families. There are a number of reasons why a retiree would roll their savings out of his or her company’s retirement plan (most of our clients do so in order to access an expanded universe of investment options). However, there are some planning factors that ought to be considered beforehand:
1. Does your 401(k) hold company stock that has appreciated substantially in value? If so, consider utilizing the IRS’ treatment of Net Unrealized Appreciation (“NUA”) to roll that company stock out of the plan. If you are not familiar with NUA rules, we’re happy to talk with you and your accountant about the analysis — the rules are strict and the outcomes vary depending on account size, age, life expectancy, and a handful of other factors.
2. Does your occupation expose you to potential personal liability? One of the lesser-known benefits of retirement accounts is that they carry with them varying levels of creditor protection. We take great care in structuring our client accounts so as to not strip away these protections, especially when dealing with medical professionals, and would advise all clients to do the same before rolling out of the company plan.
3. Do you (or your spouse) have other IRA accounts that you may want to roll into Roth IRAs? IRA assets and 401(k) assets are treated identically in large parts of the tax code, but they differ substantially when it comes to making a Roth IRA conversion. IRA aggregation rules can throw a wrench into the best laid Roth Conversion plans, so talk with your accountant and your team of advisors before rolling that million-dollar 401(k) to an IRA.
4. Since 2006, employers have had the option of offering their employees a Roth 401(k) in addition to the standard pre-tax 401(k). If you have been contributing to a Roth 401(k), consider some of the distribution differences between Roth IRA accounts and Roth 401(k) accounts, as these are often an important factor in deciding whether to roll the account to a Roth IRA.
5. Finally, if you are rolling out of an employer plan, make sure you understand where your assets are being rolled to. Generally speaking, employer plans offer broad options at relatively low fees and are a pretty good deal for the participant. If you are considering rolling your savings over, be sure to understand exactly what it is you are paying for and why.
Rolling a 401(k) out of an employer plan is one of the more substantial financial decisions an individual makes when he or she retires. If you have that million-dollar retirement account and have questions about the most efficient manner in which to handle the account going forward, our planning team is happy to discuss these and other planning issues with you.