8 Pros & Cons of Retirement Plans vs. Rollover IRA's

| November 05, 2018
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1) Protection against creditors

Retirement plans- The federal Employment Retirement Income Security Act (ERISA) shields retirement plans from creditors.  If someone wins a judgement against you in a personal injury lawsuit, (think OJ Simpson) they can’t touch your retirement plan assets.  

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IRA’s- Are protected in bankruptcy up to a limit of $1,283,025.  IRA protection from creditors varies state-by-state.

2) The ability to borrow funds

Retirement plans- Many plans may offer loan provisions on vested balances.

vs.

IRA’s- Loans are not permitted, you may have temporary access through a distribution and rolling assets back into an IRA within 60 days[1].

3) Investment choices and fees

Retirement plans- Investment choices are primarily in a limited number of mutual fund investments or collective income trusts (CIT’s), which are akin to non-publicly offered mutual funds.  Mutual funds and CIT’s are subject to market risk, expense ratios and the lack of predictability or a defined outcome or maturity that bonds or CD’s may offer.

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IRA’s- May be invested in a highly diversified manner with investments outside of mutual funds such as individual stocks, ETF’s, options, annuities, bonds and CD’s and also alternative investments, which may include real-estate investments, precious metals or other.  Expense ratios could be as low as 0 for individual securities and .03% for index funds.  The key difference is that there could be a level of predictability built in through the use of bonds, CD’s and annuities which CANNOT be replicated in a retirement plan.

 

4) Managing assets in a more cohesive and consolidated manner

Retirement plans- Previous plans may generally be consolidated by rolling into a current plan.  The issues remain the same with respect to limited investment choices, presumably higher fees and inability to manage and plan due to the lack of flexibility.

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IRA’s-  Easier to view, manage and analyze your retirement savings when rolling over past retirement plans into a single, diversified IRA. This will accommodate you or your financial advisor to more adequately manage the assets as well as being able to run performance reports and financial planning and retirement projections.

5) Flexibility for Withdrawals

Retirement plans- Aside from ability to borrow funds, typically plans may allow “hardship withdrawals” in certain situations as defined by the IRA as an “immediate and heavy need.”  The 10% withdrawal penalty would be waived upon these early distributions, but taxes will still be owed. 

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IRA’s- Cast a wider net allowing penalty-free withdrawals with a limit of $10,000 for higher education expenses and a first-time home purchase.  Once again, taxes will be owed. 

6) Managing Distributions

Retirement Plans- Many plans allow distributions on plans at “age of separation” but no earlier than age 55. A number of plans may accommodate regularly scheduled installments while others may have an “all or nothing” requirement where you either leave the money in the plan or you withdraw the entire amount. Many plans that allow for installment withdrawals don’t allow you to specify which investments to sell, instead they take an equal amount out of each investment.

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IRA’s- Qualified distributions from traditional IRA’s can’t begin until age 59½ unless you start a series of substantially equal distributions (Section 72 (t), section 2) based on IRS regulations.  If taking distributions past the age of 59½, the 10% early-withdrawal penalty is avoided and you may manage withdrawals, choose the investments to sell and the amount of tax withholding according to your needs.

 

7) Delaying Distributions

Retirement Plans- If you plan to work past 70½ you are not required to begin taking your required mandatory distribution (RMD) until you retire. Plans that will allow rollovers from previous retirement plans may allow you to shelter those assets from taking an RMD as well until you eventually retire.

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IRA’s- You may delay taking your first RMD to the April following your 70½ birthday but then you’re required to take 2 RMD’s.  Delaying distributions may still be a good planning idea for those that are still working or have unexpected ordinary income (think severance or vacation pay) in the year in which they turn 70½.

 8) Contributions to a Roth

Retirement Plans- If offered by employer, a Roth 401(k) contribution may be of great interest since as opposed to Roth IRA contributions there are NO income limits.  Although, you would forego the tax deduction on contributing some or all of your money into a Roth 401(k) for those that want to have more control over distributions and having those distributions free from taxation this is a great benefit. 

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IRA’s- No income limits on Roth IRA conversions even though there are income limits on contributions to a Roth IRA. Certain strategies exist to attempt to minimize the taxation on the Roth conversion[2]. 

 

Have a question about this topic? Contact us today. 

Our team at RZ Wealth is committed to helping clients prioritize and understand their needs to best guide them with insightful wealth management including financial, education, retirement and estate planning.

[1]Check IRA guidelines for restrictions and rules

[2]Check IRS guidelines for restrictions and rules.

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