FYI Series: What You Need to Know about Employer Retirement Savings Plans

When you leave your employer, you have several options available to you for managing your retirement savings plan assets. You can leave the money in the current plan, if allowed; you can cash out and take a lump-sum distribution; or you can roll over the funds from your current plan into an IRA or another employer plan, if allowed.

Why consider a rollover?

When you roll over a distribution from a 401(k), 403(b), or governmental 457(b) plan, you generally don't pay any taxes until you receive a distribution from the new plan or IRA. If you take a distribution but don't roll it over, it will be subject to federal (and possibly state) income taxes (except for any after-tax contributions you've made); and if you haven't yet reached age
59½, you may also be subject to a 10% early distribution penalty tax unless you're eligible for an exception.1 If you take a cash distribution, you're also foregoing any further tax-advantaged
growth; and if you spend the funds, you may not have sufficient assets to last throughout retirement.

  • Special rules apply to distributions from designated Roth accounts: Qualified distributions are entirely tax-free, and only earnings are taxed if your distribution is nonqualified. A distribution is qualified if you satisfy a five-year holding period and you are age 59½, disabled, or use the funds to purchase your first home ($10,000 lifetime cap). State tax rules may be different.

  • Not all distributions are eligible to be rolled over. You cannot roll over hardship withdrawals, required minimum distributions, substantially equal periodic payments, corrective distributions, and certain other payments. Non-spousal death benefits can be rolled over only to an inherited IRA, and only in a direct rollover.

Reasons to roll over to an IRA

  • You generally have more investment choices with an IRA than with an employer plan. You typically may freely move your money around among the various investments offered by your IRA trustee, and you may divide your balance among as many of those investments as you want. By contrast, employer plans typically give you a limited menu of investments (usually mutual funds) from which to choose.

  • You can freely move your IRA dollars among different IRA trustees/custodians. Unlike indirect (60-day) rollovers between IRAs, which are generally limited to one in any 12-month period, there is no limit on how many direct, trustee-to-trustee IRA transfers you can do in a year. This gives you flexibility to change trustees often if you are dissatisfied with investment performance or customer service. It can also allow you to have IRA accounts with more than one institution for added diversification. With an employer's plan, you cannot move the funds to a different trustee unless you leave your job and roll over the funds.

  • An IRA may give you more flexibility with distributions. The distribution options available to you and your beneficiaries in an employer plan are typically more limited. With an IRA, the timing and amount of distributions are generally at your discretion (until you must start taking required minimum distributions, if applicable).

  • If you've made Roth contributions to your 401(k) or 403(b) plan, those contributions (plus any investment earnings on them) will be subject to required minimum distribution (RMD) rules after you turn 72 (or after you retire, if later, if you own 5% or less of your employer).2 You can avoid the RMD rules by rolling your Roth contributions over to a Roth IRA (Roth IRAs are not subject to the lifetime RMD rules).

  • You can use an individual retirement annuity to effectively annuitize all or part of your employer plan benefit. This can be helpful if your plan doesn't provide an annuity option.

Note: Before investing in a mutual fund, carefully consider the investment objectives, risks, charges, and expenses of the fund. This information can be found in the prospectus, which can be obtained from the fund. Read it carefully before investing. Diversification alone cannot guarantee a profit or ensure against the possibility of loss. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any strategy will be

Other considerations

Both employer retirement plans and IRAs typically have: (1) investment-related expenses and (2) plan or account fees. Investment-related expenses may include sales loads, commissions, the expenses of any mutual funds in which assets are invested, and investment advisory fees. Plan fees typically include plan administrative fees (e.g., recordkeeping, compliance, trustee fees)
and fees for services, such as access to a customer service representative. In some cases, employers pay for some or all of the plan's administrative expenses. An IRA's fees may include,
for example, administrative, account setup, and custodial fees. Be sure to carefully consider the expenses and fees in each alternative.

Also be sure to consider the different levels of service available under the employer's plan versus an IRA. Some employer plans, for example, provide access to investment advice, planning tools, telephone help lines, educational materials, and workshops. Similarly, IRA providers offer different levels of service, which may include full brokerage service, investment advice, distribution planning, and access to securities execution online.

Special considerations for distributions from designated Roth accounts

In order to receive a tax-free qualified distribution of earnings from a Roth IRA or from a designated Roth 401(k), 403(b), or 457(b) account, you must satisfy a five-year holding period. Separate five-year holding periods apply to designated Roth accounts and Roth IRAs. If you receive a nonqualified distribution from a designated Roth account and roll it over to a Roth IRA, the investment earnings rolled over will then be subject to the Roth IRA's five-year holding
So, for example, if your money has been in a designated Roth account for four years, and you roll those dollars into your first Roth IRA, they will be subject to a new five-year holding
period — the amount of time those dollars spent in the 401(k) plan does not affect your Roth IRA holding period.

On the other hand, if you receive a distribution from your designated Roth account and roll it over into a designated Roth account in a new employer's 401(k), 403(b), or 457(b) plan, your five-year holding period in the receiving plan, for both the amount rolled over and other funds in the receiving plan, will be the five-year holding period in the distributing plan or the five-year holding period in the receiving plan, whichever ends first (i.e., whichever is more favorable to you).

Required minimum distributions (RMDs) are generally required from Roth 401(k)/403(b) accounts after you turn 72 (or after you retire, if later, unless you're a 5% owner).

However, Roth IRAs are not subject to the lifetime RMD rules. You can avoid the Roth 401(k)/403(b) lifetime RMD rules by rolling your eligible distribution over to a Roth IRA.

This information is not intended as tax, legal, investment, or retirement advice or

1If your distribution includes employer stock or other securities special tax rules may apply that
can make taking a distribution more advantageous than making a rollover. Consult a tax professional.

This information is being provided only as a general source of information and is not intended to be the primary basis for financial decisions. It should not be construed as advice designed to meet the needs of an individual situation. Please seek the guidance of a professional regarding your specific financial needs. Consult with your tax advisor or attorney regarding specific tax or legal advice. Brokers International Financial Services, LLC offers securities and investment advisory services through representatives registered with this firm. Products and services offered by your representative vary by registration. Member SIPC. Brokers International Financial Services, LLC is not an affiliated company. Investment advisory services offered through Legacy Financial Group, LLC, a Registered Investment Adviser. Past performance is no guarantee of future returns.