One of the questions we're frequently asked by clients is what to do with their company sponsored retirement plan once they leave their employ. Our response is inevitably "don't forget to take it with you." When it comes to leaving your retirement account with your employer's plan or rolling it into an IRA instead, rolling over the proceeds has some great advantages:
Wider investment selection
Most company sponsored plans have limited investment options; what's more, the investment options available usually are not enough to create a well-diversified portfolio. By rolling your money into an IRA at a discount brokerage firm, you gain access to the entire fund universe, in addition to the ability to invest in exchange-traded funds, individual stocks, bonds and CDs. This wider selection of investment options has two main benefits: it increases your ability to diversify your portfolio, which ultimately results in reducing the amount of risk you are taking, and provides for the potential to improve returns because you now have access to the best performing investments rather than being limited by your plan selections.
Increased Ease of Management
It is not uncommon for a person to switch employers 2-3 times, or more, over their career. Imagine if at each job, you participated in a company-sponsored retirement plan, but rather than rolling the account over into an IRA when you severed ties with your employer, you left your money behind. Pretty soon, you will have the daunting task of keeping track of multiple accounts and making sure that your investments do not overlap. The easiest way to avoid such a headache is to roll over any eligible company retirement plans into a single IRA. Not only will it cut back the amount of paperwork you receive, but it will also make your overall portfolio easier to manage. In addition, in the future when it may become necessary for you to start tapping your retirement savings, creating an income stream will be made simpler by having your funds consolidated in one account.
More Flexibility with Beneficiaries
In most company-sponsored retirement plans, if you are married your spouse must be named 100% primary beneficiary of your account, and if he/she is not you must have your spouse's consent in writing to not be named as primary beneficiary. This is not the case with an IRA, where you can name whomever and however many beneficiaries you want for your account. This flexibility can be important, especially in situations of a second marriage, where an account holder may want to leave his/her retirement account to their children rather than a new spouse.
Once you have made the decision to roll that company retirement account over into an IRA there are a few things you should keep in mind so as to avoid a run-in with the IRS:
Request a DIRECT ROLLOVER of your account - which usually means that the company's plan trustee will either directly transfer your account assets to your designated IRA custodian or cut a check for proceeds made out to same custodian. You do NOT want your company plan trustee to send you a check made out to you; otherwise the IRS will look at this transaction as a distribution, for which taxes will be owed.
If you do happen to receive a check in your name from your company's retirement plan, you can still avoid paying taxes (and a 10% premature distribution penalty if you are under age 59 ½) by depositing the check into an IRA within 60 days of the date of distribution. Remember, the full amount distributed, including any amount automatically withheld for taxes by your employer, must be deposited into the IRA in order to qualify the transaction as a rollover; this means you may have to come up with the cash to cover any tax withholdings, but you will get this amount back when you file your tax return for the year.
Whether you are switching jobs or leaving the workforce for good, it makes the best sense to take your money with you by directly rolling it into an IRA. Doing so will save you a lot of time and effort in the future when it comes to managing your investments and eventual distributions. Most importantly, it provides an opportunity to improve your portfolio's long-term return by putting the best performing investments at your fingertips. Find out more about: retirement