“Where is the rollover and conversion market?”
Just about everywhere.
There are very few clients who don’t have some qualified account somewhere, whether it’s an individual retirement account, 401(k), or something else. So, asking customers about this can potentially uncover business opportunities.
Furthermore, with recent positive changes in the law, particularly with the conversion opportunity to Roth IRAs in 2010, rollovers and conversions deserve special focus for the next few years.
First, here are some reasons why it makes good sense to roll over IRAs to qualified plans, such as 401(a)/(k), 403(b), and 457(b) governmental plans.
Creditor protection/bankruptcy (for qualified plans 401(a)/(k) only): In creditor matters, qualified plan assets cannot be assigned or alienated (IRC Section 401(a)(13)). This is a powerful tool. Other than via Qualified Domestic Relations Orders and levies by the Internal Revenue Service, it’s very difficult for creditors to access qualified accounts.
For IRAs, general creditor protections vary by state and usually are not as good.
For bankruptcy, qualified plan assets are exempt from federal bankruptcy proceedings, while traditional and Roth IRA protection is only available up to $1 million. But for qualified plan (401(a)/(k)) assets placed into a rollover IRA, those assets do not have a $1 million cap and are fully exempt from bankruptcy as well (11 U.S.C. ? 522(d)(12)).
Participant loans: Qualified plan assets can be used for plan loans, which are not allowed in IRAs.
Life insurance: One can use qualified plan assets for larger life policy premiums, particularly in profit sharing plans where certain rules permit a larger portion of the assets for insurance premiums. (Example: More than two-year old money can be used 100% for insurance; 5-year plan participants can use 100% of plan assets for life insurance, etc.) However, life insurance is not allowed in IRAs.
Delay required minimum distributions (RMDs) for active workers and spouses in death distributions. For non-5% owners (i.e., they don’t own 5% or more of the business) in qualified plans and 403(b)s, RMDs aren’t required until the later of age 70 1/2 or actual retirement. But in IRAs (except Roth IRAs, where no minimums are required), RMDs must begin at 70 1/2 , even if the person is still working.
Also, if the surviving spouse in a death distribution is older than the decedent, and the object is to delay distributions as long as possible, it is okay to leave the assets in the plan until the decedent would have been 70 1/2 had he or she lived; this further delays the start of the RMD. Keep in mind that the no-RMD requirement only applies to 2009.
Exception to the 10% premature distribution penalty tax: For qualified plans and 403(b) accounts (not IRAs), there is an exception to the 10% penalty tax for premature distributions provided the person first attains the plan’s early retirement age (not earlier than age 55), and then separates from service. All distributions coming out of the plan in whatever manner are not subject to the 10% penalty.
Spousal rollovers of death distributions: The above reasons may also be relevant for spouses who receive eligible rollover distributions of death distributions and who have the option of rolling over these assets into their own 401(a)/(k) and 457(b) governmental plan as well as to their own IRA.
Next, why should clients consider going the other way, and rolling over qualified 401(a)/(k)s, 403(b)s and 457(b) governmental plans into traditional IRAs?
Some plans may force distributions at retirement or other distributable event, which is not true with IRAs. Also, the client may want the ability to choose and diversify investment vehicles and access the assets at any time. IRAs offer that level of control.
Interestingly, the following exceptions to the 10% premature distribution penalty tax only apply to IRAs and not to qualified plans: Medical expenses in excess of 7.5% of adjusted gross income; health insurance premiums for unemployed individuals; qualified higher education expenses; and qualified first-time homebuyer distribution.
So, if the client needs any of those exceptions, and if the qualified plan allows, move the money over to the IRA.
Finally, what about Roth conversions? That is, why convert qualified 401(a)/(k) plans, 403(b)s, 457(b) governmental plans, and IRAs into Roth IRAs?
There are many good reasons, such as: the client wants to pass assets tax-free to succeeding generations, is concerned with higher tax rates even after retirement, or wants to delay RMDs after age 70 1/2 (no RMDs with Roth IRAs, remember). Another good reason is if the client wants to keep taxable income down from Roth distributions to offset other taxes due.
Ron Merolli, JD, is director of advanced sales for National Life Group, a trade name for National Life Insurance Company, Montpelier, Montpelier, Vt. His e-mail address is firstname.lastname@example.org.