Is an IRA Rollover Right for You?May 09, 2023
How to get a big pay hike
If you want a big pay hike, sometimes the only way you're going to get it is by jumping ship to a new employer who values your skill set and experience and is willing to pay for it. Otherwise you may have to settle for an annual cost of living increase. People will make several job changes over a working lifetime for this reason.
What do I do with my old retirement plan?
A default answer with many advisers is to tell people to move the funds to a rollover IRA. Often good advice, but not always in your best interests. Let's consider:
Reasons TO DO a Rollover IRA
- A huge range of investment options, including cryptocurrencies. If it is traded on a secondary market, we can get it for you in your account. This includes shares of start-up companies that could potentially explode. Employer plans tend to offer nothing much beyond the plain vanilla large/mid/small cap funds.
- RIA fees will be higher than what you pay in your work retirement account. But an IRA account with a firm such as CameronDowning also gets you a personal advisor, who knows you and your circumstances, and is actually pleased to meet with you periodically (at least annually) over the years to serve your best interests and reevaluate as life changes come your way.
- Distributions from your IRA are easy. We can set them up to be periodic (weekly, semi-monthly, monthly, etc.) with electronic transfer to your checking account. You can vary the amount of tax withheld. All it takes is a call to your adviser.
Reasons Why NOT to do a rollover IRA
- If your plan at work is covered by ERISA legislation (Employee Retirement Income Security Act) – typically a profit sharing or 401K – it has complete creditor protection, no matter the balance. An IRA will have limited creditor protection, typically up to the amount needed to maintain your lifestyle.
- Loans are permitted from employer plans. No loans ever from IRAs.
- Early withdrawal penalties of 10% apply to retirement plans before age 55. It is age 59 ½ for IRAs. So if you are age 55, separated from service, and rolled your retirement funds into an IRA, you’ve just given yourself 4 ½ years of 10% withdrawal penalties.
- Higher fees paid to a Registered Investment Advisory firm rather than within the employer plan, as noted above.
- If you have employer stock in your plan, consider a distribution to an individual account. You'll be taxed now on the basis of that stock, but when you distribute you'll pay capital gains tax - much lower than the ordinary income taxation on IRA distributions. I've written a separate post on this topic here.
You May Not Have a Choice
You may not have a choice here; it all depends upon the plan. In some employer plans if you are no longer employed there they want you to get your money out right away. In others, they allow you to continue participating in the plan into retirement or even for life. So knowing what you have and how it works is crucial for making a wise decision.
Here at CameronDowning we have a fiduciary responsibility to help you weigh all these factors so that you can make an informed decision that is in your best interests.
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