Financial Architects

Financial Planning & Wealth Management

Qualified Plan to IRA Rollover Analysis

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Factors in the decision can be divided into major (almost always important) and minor (rarely important).

Major Factors:

Investment Fees – qualified plan options are almost always more expensive than the best options available through an IRA.

Advantage: IRA Rollover (at worst a tie)

Investment Quality – “quality” refers to considerations such as, but not limited to:

    1. Optimal breadth of diversification at the fund and portfolio levels
    2. Effective targeting of the asset class or factors desired at the fund and portfolio levels
    3. Optimal weighting of the holdings within each fund (equal, fundamental, market-cap, etc.)
    4. Optimal turnover (trading and rebalancing) within each fund
    5. Appropriate (low) style drift and active risk
    6. Transparency of both strategy and implementation
    7. Reputation and skill of the fund manager

Most qualified plan options are inferior in quality compared to the best options available through an IRA.

Advantage: IRA Rollover (at worst a tie)

Minor Factors:

Consolidation/Simplification – for individuals with multiple accounts, “cleaning up” by consolidating into the fewest number of accounts necessary is frequently desired – particularly for those subject to RMDs (Required Minimum Distributions).

Advantage: IRA Rollover

Backdoor Roth – for individuals:

    1. with no existing IRA balances, and
    2. who have earned income, and
    3. who are unwilling or unable to use a solo-401(k) option, and
    4. who are over the relevant AGI limits, and
    5. who have taxable savings,

a so-called “back-door” Roth contribution is available only by not rolling over.

Advantage: Qualified Plan

Net Unrealized Appreciation (NUA) – for individuals:

    1. with low-basis employer securities in a qualified plan, and
    2. a need for a withdrawal above RMD amounts from retirement accounts soon,

a qualified plan allows the more favorable NUA treatment.

Advantage: Qualified Plan

Plan Loans – for individuals:

    1. whose employer offers plan loans, and
    2. who need, or might need, that liquidity,

leaving the funds in the plan leaves open that source of liquidity.

Advantage: Qualified Plan

Delay of RMD – for individuals:

    1. who are over their relvant RMD age (or expect to reach that age with the other items on this list still true), and
    2. who are employed at the plan sponsor, and
    3. who own less than 5% of their employer, and
    4. who wish to delay drawing funds from their account,

leaving funds in the plan delays the RBD (Required Beginning Date) of the RMD (Required Minimum Distribution).

Advantage: Qualified Plan

Early Withdrawals (part I) – for individuals

    1. who separate (or anticipate separating) from service prior to age 59½, and
    2. who separate (or anticipate separating) from service after age 55 (age 50 for public safety employees of a state, or political subdivision of a state, in a governmental defined benefit plan), and
    3. who will need funds from their current employer plan prior to age 59½, and
    4. do not want to utilize rule 72(t),

leaving the funds in the plan leaves open that source of liquidity.

Advantage: Qualified Plan

Early Withdrawals (part II) – for individuals:

    1. who might need funds from their account,
    2. prior to attaining age 59½, for
    3. qualified higher education expenses, or
    4. first-time home purchase, or
    5. health insurance premiums while unemployed,

rolling over the funds to an IRA creates that source of liquidity.

Advantage: IRA Rollover

Creditor Protection – for individuals with significant asset protection concerns, a qualified plan is somewhat better (protection “from creditors” vs. “in bankruptcy”).

Advantage: Qualified Plan

Lower Tax Withholding – for individuals who desire less than 20% of their distributions to be withheld for taxes, only the IRA option will permit this.

Advantage: IRA Rollover

Qualified Charitable Distributions – for individuals:

    1. who are over age 70½, and
    2. have charitable intent,

rolling over the funds to an IRA permits an essentially above-the-line deduction for charitable gifts.

Advantage: IRA Rollover

Tax Efficient Fee Debiting – since advisory fees on IRAs can be billed from the IRA (without being considered a taxable distribution) rolling over the funds to an IRA permits payment of the advisory fees with pre-tax dollars.

Advantage: IRA Rollover

Spousal Alienation – the beneficiary of a qualified plan may not be changed by the owner without the spouse’s approval, an IRA beneficiary may be changed without any such approval. Thus, for individuals who wish to leave the proceeds to a non-spouse beneficiary, without the spouse’s approval (and perhaps knowledge) an IRA will permit that.

Advantage: IRA Rollover

Payout Options – a qualified plan may (depending on plan rules) require a 10-year payout for eligible designated beneficiaries.

Advantage: IRA Rollover

Beneficiary Roth Conversions – a qualified plan allows a non-spouse beneficiary to convert to a Roth IRA.

Advantage: Qualified Plan

Tax-Efficient Distributions – for individuals:

    1. with a basis percentage higher in their IRA than in their qualified plan, and
    2. a need for withdrawals above RMD amounts,

a withdrawal from the IRA balance without co-mingling the qualified plan balances will be more tax efficient.

Advantage: Qualified Plan