From the November 2008 issue of Boomer Market Advisor • Subscribe!

Four critical rollover questions for your boomer clients

As baby boomers shift from work to retirement, they're driving a huge influx of assets in the IRA market. In 2007, IRA assets grew 12.5 percent, the fifth straight year of double-digit growth, according to the Employee Benefit Research Institute.

Not surprisingly, EBRI found this growth was driven not by new IRA contributions but from rollovers from other retirement plans, such as defined contributions plans. In fact, total IRA assets in 2007 were $4.75 trillion, compared with $3.49 trillion for DC plans and $2.33 trillion for DB plans, the EBRI said.

The client's interest in a rollover opens the door to a broader discussion about the shift from accumulation to distribution, from investment time horizon to longevity risk. Are you asking the right questions to ensure your suggested approach to their rollover is aligned with their thinking? Here are four questions to consider asking your clients seeking guidance on rollovers.

  1. Have you considered a Roth IRA? Roth IRAs continue to attract significant new deposits, and are outpacing the growth rates of traditional IRAs. At present there is a significant hurdle to converting from a traditional IRA to a Roth: the client's adjusted gross income has to be below $100,000. But that AGI limit will go away in 2010, so the client's time window for the rollover is an important consideration too. And, of course, Roths must be funded with after-tax dollars. But, the advantage of a Roth is that it will provide your client with tax-free retirement income that is unrestricted by the mandatory withdrawal rules of traditional IRAs, thanks to the tax-free growth feature of a Roth IRA.
  2. Are you holding on to several small retirement accounts that perhaps should be consolidated? Baby boomers have experienced more career mobility than their parents, leading many to have old qualified plan assets still sitting with a number of former employers. For many, this set of disconnected accounts may represent an age-old strategy: Don't put all your eggs in one basket. But, in reality, these accounts pose two distinct disadvantages. The first is that the smaller pools of assets are not weighed in the context of your client's total portfolio; neither you (nor the client, in all likelihood), know just how much risk these assets might pose to an otherwise balanced portfolio. The second potential disadvantage is the cost: The client may be paying any number of multiple fees and charges related to these separate accounts.
  3. Is there company stock in your retirement accounts? In many cases, a client may overlook a sizeable tax benefit by simply rolling over all qualified plan assets directly into an IRA without considering the value of company stock in those assets. Net Unrealized Appreciation of company stock is the difference between the current value of the client's stock within the qualified plan, and the total amount the client and the company originally paid for that stock. In many cases, the NUA will be many times higher than the original cost. As a result, the client may be eager to roll over the NUA to the rest of the account in order to avoid current taxes. But, when the client finally withdraws this money, he or she will pay ordinary income tax rates as high at 35 percent, even though the NUA normally would be subject only to capital gains tax, currently 15 percent. To avoid this scenario, you may counsel your client to look into transferring only the non-stock portion of the qualified account into the IRA and then take an in-kind distribution of the company stock. In the long run it could save tens of thousands in federal taxes, thanks to your good advice.
  4. When do you think you'll need to access your money, and are you concerned about managing your retirement income? Financial advisors will often ask these questions in the context of an overall financial planning process, but one-off rollovers also provide an opportunity to revisit a potential retirement date and the client's thinking on retirement phase withdrawal. The client's answers might be a surprise. Despite the recent trend that has people pushing back their retirement dates, we have to remember that these trends represent averages, and clients are individuals. We think, for example, that boomers are poised to inherit billions of dollars from the Greatest Generation, based on often-quoted statistics of the Social Welfare Research Institute. With such a large intergenerational wealth transfer, your client may be anticipating a significant inheritance and pondering early retirement, yet dreading the complex financial moves.

Now, combine the inheritance dimension with the perennial issue of retirement income and you've opened a critically important conversation. As they look to rollover assets into an IRA, they will have questions about which type of new investment might better serve them as an income vehicle. If this is the case, you might consider discussing variable annuity options with them.

There are a number of innovations in this product category that make it easier to pursue continued investment growth without necessarily sacrificing reliable future income.

By raising these four questions in your rollover conversation with boomer clients you will be positioned to help them clarify their goals, secure appropriate products, mitigate tax losses and ease their minds about the uncertainty of their retirement years. At the very least, your targeted inquiries will remind them of your breadth of knowledge about the "spending years" and the value of their relationship with you as they move forward into the best years of their lives.

Kathleen Murphy is CEO of ING U.S. Wealth Management. She leads a range of businesses, including ING's defined contribution (401(k), 457, 403(b)) segments, the rollover/payout business, both the fixed and variable annuities businesses and the ING Advisors Network business unit.

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