As people look forward to retirement, there are many options to consider concerning the distribution of funds from qualified retirement plans.
In terms of plan options, people commonly roll over their money from employer-based plans (EBPs) to individual retirement accounts (IRAs). The benefit of doing so is that “IRAs permit more investment options than what one typically sees in employer-based plans and they allow people to customize their investment allocation better than an EBP does,” explains John Dovich, president of John D. Dovich & Associates, LLC. “Another option is to keep money in the EBPs, the big caveat being that investment choices are typically limited.”
Some less common options include rolling over money directly into a Roth IRA, in which future retirement withdrawals are not taxable and there are no required minimum distributions at age 70 1⁄2 (an important age to remember). However, the challenge of a Roth IRA for most people is they will incur an immediate tax on the full balance of the account when they roll over money into it and, for the biggest benefit, they should pay the tax from dollars outside of the account. Additionally, if you have employer stock in your qualified plan, you may want to consider Net Unrealized Appreciation (NUA).
“The rules around NU A are very complex but very critical to understand,” says Tom Lalley, a principal at John D. Dovich & Associates, LLC.
Also, if someone is not actually going to stop working but is rather simply leaving one job for another, they can take a distribution and roll it over to a new EBP if the new employer allows it. The key, again, is understanding the new plan, the investment options and the underlying fees/expenses.
At actual retirement age, many retirement plans have annuity options that allow people to take their money and convert it into fixed payment for their life or for their life and the life of their spouse. Under annuity options, an insurance company takes control of one’s retirement plan savings in exchange for a periodic distribution. That person need not worry about market fluctuations and they know there will be money coming to them regularly.
“Depending on the math, annuity options can be very good for some and not so good for others,” says Bill Bruns, a principal at John D. Dovich & Associates, LLC. “So it is really important to have a discussion with an advisor to find out what ramifications each decision has and what options are best.”
There are two important dates to consider when thinking about retirement plan distributions. At 59 1⁄2, a person can begin to withdraw from a retirement fund without incurring a 10 percent tax penalty. At 70 1⁄2, people who have funds available but have deferred taking out money or perhaps aren’t taking out enough to satisfy government rules about withdrawals must begin to take out what the IRS considers a minimum distribution.
The first date is especially important for those who might want to retire before age 59 1⁄2. If they need distributions from their EBP or IRA they can take substantially equivalent payments over a certain period of time and avoid the tax penalty.
Dean Johns, a principal at John D. Dovich and Associates, LLC says, “We find many professionals, particularly CPAs in large accounting firms, considering early retirement due to the high demands of their jobs. However, cash flow could be a concern in the early retirement years and substantially equivalent payments may be worth considering. The trick is there are three different payment options available and three different life expectancy tables to use in terms of calculating this payment.”
The right plan for each person is best selected with the aid of an advisor because people must continue the same payments for the later of five years or age 59 1⁄2 and choosing the appropriate plan can make a significant difference in distribution amount, as the example shows.
Dovich stresses that every situation is unique and that no one should think of their retirement plan as just one bucket of assets. “We stress the need for multiple buckets of assets (pre-tax, Roth, and taxable) and to have multiple strategies that include the possibility of a long-term care event. We strive for our clients to have flexibility during retirement to use assets in the most tax efficient manner possible and to stretch the assets for as long as possible.”
John D. Dovich & Associates is located at 625 Eden Park Drive, Suite 310, Cincinnati, OH 45202. You can reach them at 513.579.9400 or visit their website at www.jdovich.com.