From the July 2006 issue of Boomer Market Advisor • Subscribe!

Should I stay or should I roll?

Most 401(k) plan participants have the right to roll over their plan assets to an IRA when they change jobs, retire or reach age 59. The decision when to actually implement an IRA rollover depends on various factors, including
the age of the participant, when they expect to retire, when they need access to their assets and what they intend to do with the assets after they die.

Benefits of keeping assets in the 401(k) plan -- In my experience, most people are probably better off rolling their retirement assets to an IRA. However, there are exceptions to that general rule. For instance, a participant may wish to keep the money in the 401(k) plan if the participant plans to continue working past the age of 70 and does not wish to begin taking distributions. That's because required minimum distributions from a 401(k) do not begin until after the participant retires or turns 70 years old, whichever is later. However, this rule does not apply for participants who own more than 5 percent of the business sponsoring the retirement plan. For those who are more than 5 percent owners, RMDs must always begin at age 70.

If your client plans to retire after age 55 and will be taking withdrawals from a 401(k) plan before he turns 59, the client may wish to leave some assets in the plan. There is an exception to the 10 percent early withdrawal penalty for withdrawals from a 401(k) for participants who retire after age 55. Also, a particular 401(k) plan might offer a loan feature to participants who need immediate access to retirement assets.

Finally, 401(k) assets may lose creditor protection provided under Title I of ERISA when the assets are rolled to an IRA. Of course, IRAs are now afforded the same creditor protection as other retirement plans, including 401(k) plans, under the new federal bankruptcy laws. However, a distinction should be made between the creditor protection afforded under the federal bankruptcy code and that of ERISA.

Benefits of rolling assets to an IRA -- Most people keep money in their 401(k) plans because they become complacent with their retirement plan. The easiest thing to do is nothing at all. However, I find that IRAs provide greater control and flexibility than most 401(k) plans. This is because participants in 401(k) plans are subject to the terms and conditions of the plan document. These documents tend to offer few investment options and place restrictions on plan transactions. Furthermore, by rolling the money to an IRA, clients can benefit from the services of a professional investment advisor.

Another important reason to roll retirement assets is that IRAs tend to offer more beneficiary options than 401(k)s. Most 401(k) plans do not permit beneficiaries to stretch their distributions over their lifetime. I suspect that 401(k) plans do not permit a stretch because employers do not want to keep the administrative burden, cost and fiduciary responsibility for someone who is not their employee. Of course, if the beneficiary is a spouse, he or she can roll a 401(k) distribution to an IRA without an income tax penalty. But most non-spousal beneficiaries will be subject to immediate income taxes.

Even if your clients' 401(k) plans allow for stretch payments, it might still be better for them to roll the assets to an IRA in order to provide non-spousal beneficiaries with more flexibility. A non-spousal beneficiary will be stuck with the 401(k) plan and its restrictions for the rest of his life, whereas IRA beneficiaries can always transfer to other IRAs.

Brandon Buckingham is director for qualified plans - wealth management with John Hancock Life Insurance Co.

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