If you have accumulated assets in multiple employer retirement savings plans — such as a 401(k) — or are retiring and would like to move assets out of your employer's plan, it might make sense to execute a rollover to an Individual Retirement Account (IRA).
A rollover IRA may provide the broadest range of investment options, and could simplify your investment strategy. By consolidating, your asset allocation decisions could be easier, and you can monitor progress on fewer accounts, saving you time, reducing confusion, and possibly reducing account maintenance fees. Estate planning benefits may also exist as IRAs typically offer more flexible options for transferring assets to beneficiaries than do employer-sponsored plans.
As with most financial considerations, a little advance planning can go a long way.
Key Considerations for IRA Rollovers
1. If you are happy with the investment and distribution options of your employer-sponsored plan(s), your employer may allow you to continue as a plan participant after your employment ends. Your investment choices and distribution options will be limited to the plans offerings, though. IRAs typically provide exposure to a wide assortment of investments that you and/or your financial professional can control. This may help eliminate overlap of investments and allow you to streamline your total retirement portfolio to focus on your objectives. You also have more power to choose investments based on their administrative costs and fees for asset management.
2. The most efficient rollover requires that you first establish your IRA, and then contact your employer-sponsored plans asking the administrators to transfer your assets directly to the custodian of the new IRA. This helps you avoid the mandatory 20% withholding that is required if you personally take possession of the money.
3. If you do take possession of a retirement plan distribution, you can still avoid paying taxes if you complete your rollover within 60 days, but you'll need to use your own personal savings to replace the 20% that will be automatically withheld. When you file your income tax return for the year, you can acknowledge the 20% withholding. Depending on the remainder of your tax circumstances, you may receive the withheld amount back as a refund. If you don't fund the IRA with all of the retirement plan distribution, and you are under age 59½, you may owe a 10% penalty on the amount that isn't rolled over to the IRA. You'll also owe income taxes on this amount, so be prepared for an additional tax bill if your income tax bracket is above 20%.
4. IRA beneficiaries may have more opportunities than employer-sponsored plan beneficiaries to continue the tax-deferred treatment of the assets rather than accepting lump-sum cash distributions and paying taxes all at once. Be sure to name beneficiaries on your accounts so that the tax-deferred treatment can be continued, subject to current tax laws.
5. Some companies contribute their publicly traded stock to retirement plans. If your account includes stock from your employer and it has greatly appreciated, you'll need to do a little more planning. It could be beneficial for you to request an "in-kind" distribution, which means you'll receive the actual securities separately from your lump-sum cash payment. The advantage is tax treatment. An in-kind distribution of highly appreciated stock will allow you to pay long-term capital gains taxes on the appreciated value, rather than ordinary income tax on the entire amount — cost basis and appreciated value. When you sell the stock, it will require some calculation to determine the net unrealized appreciation (NUA), which is the portion that will be taxed at the long-term capital gains rate. It can be complicated, but you don't want to inadvertently lose this benefit in the rollover process.
6. Assets held in an IRA may not enjoy the same level of protection from creditors as retirement assets held in employer-sponsored plans. If you envision debt-related issues, you may be better off keeping your retirement assets in the employer-sponsored plan.
7. In Traditional IRAs you'll face mandatory required minimum distributions after you turn 70½, even if you're still working. If you choose to continue working past age 70½, you can keep your assets in your employer-sponsored plan without making mandatory withdrawals.
Weighing Your Options
There are many variables of tax law and regulations to consider before changing the status of any of your retirement savings accounts. To help you weigh all of these options against your personal circumstances, you may want to consult a financial professional with a background in IRA rollovers.
You can also learn more by reading IRS Publication 590 detailing rules for many types of IRAs.
Fund objectives, risks, charges and expenses should be carefully considered before investing.
For more complete information, including a contract and fund prospectus that gives investment objectives, risks, charges, expenses, and other information about the investment company, contact a Northwestern Mutual Financial Network Representative, who is a Registered Representative of Northwestern Mutual Investment Services, LLC (NMIS). Read the prospectus carefully before you invest or send money.