To Roll or Not to Roll, that is the question…

Dave Kutcher

by Dave Kutcher

In Defined Contribution plans, the IRS sets limits on the maximum amount that can be contributed each year. In Defined Benefit plans, there are rules governing the resulting income benefits – or the maximum amount that the plan can pay out in retirement. In general, there are several different retirement plans available to employees and business owners, but only defined contributions provide portability when it comes time to retire.

There are many folks here in Alaska that have Defined Benefit pension plans as part of their retirement package, but few are limited to these plans with many folks having some combination of both a Defined Benefit as well as a Defined Contribution plan.

Of the employer sponsored Defined Contribution plans we see here in Alaska, 401(k) plans as well as the Government sponsored Thrift Savings Plan (TSP) are without a doubt the most prevalent.

If you are a participant in a company 401(k) or a participant in the government’s TSP plan, you will find yourself with some decisions to make at or pre-retirement.

Leave your money where it is…

Most plans allow employees to leave their funds with their employer sponsored plan and set up their distribution options from within the existing plan. Doing so, however, means contemplating on-going fees and a limited group of investment selections that may or may not suit your needs moving into this next stage of your retirement plan.

Take your money and pay taxes…

Distributing your money at retirement is an expensive proposition. Any monies for which there have been no income taxes paid such as your pre-tax 401(k) contributions, are 100% taxable upon distribution. In some cases, you might consider converting these pre-tax dollars into ROTH funds, but the time horizon for using your funds as well as prevailing tax rates play a major role in determining if this is a viable option for you. If time and taxes are not on your side, ROTH conversions may sound more sensible than they truly are. This is something you may wish to contemplate together with your tax accountant.

In general, taking your funds from your 401(k) or TSP and paying the tax bill today is not likely to produce a strategy you can live with.

Rolling over…

We see many, many people find value in rolling their available retirement funds into their own personally controlled IRA account. The idea sounds easy, but there are rules governing these transactions too and you should make sure to work with a professional to establish a direct rollover, moving your funds from your 401(k) or TSP plan administrator directly to the custodian/trustee of your IRA. If you don’t handle these types of transactions properly it could result in unwanted mandatory tax withholding of 20%.

The value in setting up your own IRA to gather your retirement plan funds for distribution purposes is multi-faceted. The biggest gain is affording yourself access to options far beyond what was available in the employer sponsored plan. Choice is good and can allow for a completely new way of managing your retirement assets or enhance your diversification by adding options to what you already utilize. You also have the option here of eliminating costly fees and management expenses that are typically inherent in the defined contribution plans.

Additionally, having a plan that can act as a catch all for any multitude of prior plans you may have had over the years makes managing your funds easier and streamlined for distribution purposes, including making sure you adhere to the forthcoming Required Minimum Distribution rules you will face at age 72.

We can’t say for sure whether a direct rollover is in the cards for you, but we think you owe it to yourself to find out if it might make sense in whole or in part as you ponder your retirement distribution options.

Our IRA rollover plans focus on providing the very best environment for you to be taking distributions; one that allows for potential growth on your monies in the years ahead while eliminating your exposure to market related investment losses.

I am Dave Kutcher, a retired Marine Corp Captain and founder and owner of Kutcher Financial Services in Eagle River. We are on the radio every Saturday morning, “Retirement in the Last Frontier”, 8:30-9:30 on AM 650, Keni Radio. You can contact us at Kutcher Financial Services, 10928 Eagle River Road; Eagle River, AK 99577, (907) 795-7452.