The novel coronavirus pandemic has disrupted many aspects of our lives this year, with unprecedented business downturns or closings. Your clients may have found themselves suddenly unemployed as a result of COVID-19. Some may be fortunate enough to find new employment, while others remain without work. In either situation, these clients will likely have access to retirement plan assets, and they may be contemplating what they should do with them.
This can be a tough decision to make.
It’s important that your clients carefully consider all of their options before moving retirement plan assets anywhere. Under federal law, employers typically cannot force former employees to withdraw their retirement savings if their vested balance is more than $5,000, so some participants may choose to leave retirement assets in the former employer’s plan. In this case, their retirement savings should remain safe, even if their previous company closes, and the retirement plan is terminated. Under these circumstances, the plan assets that are owed to them will be paid to them, in most cases, within one year.
Are They Eligible to Move Their Money?
As a courtesy to your clients, help them to determine whether they’re eligible to move money out of their retirement plan. They must have a “triggering event” that allows them to withdraw their retirement plan assets. The most common events occur when an individual retires or terminates employment with the employer who sponsors the retirement plan. Encourage your clients to check with their plan administrator or to review their summary plan description to make sure that they meet one of the plans’ triggering events.
Where Should Their Assets Go?
If your clients have access to their plan assets, simply “cashing out” may result in substantial taxes and penalties. Advise them to seek competent tax advice before taking a full distribution from their retirement plan.
Rolling over retirement plan assets to an IRA or another retirement plan may offer benefits and may help preserve the growth of their tax-deferred investments. But making a sound decision — whether to roll over assets or to leave them where they are — involves many factors, so be careful not to make a recommendation to a client that could be considered investment advice.
Benefits of a Retirement Plan-to-Traditional IRA Rollover
If your clients decide to roll over their retirement plan assets into a Traditional IRA with your financial organization, reassure them that the assets will remain tax-deferred until they withdraw them. There might be other benefits, too.
- They may roll over their pretax assets into another retirement plan offered by a future employer.
- They can invest their IRA assets and continue to grow their tax-deferred earnings.
- As their IRA administrator, your financial organization may offer a higher level of service and more investment options that appeal to them.
- They can access their IRA assets at any time and possibly take penalty-free distributions, such as for disaster relief or first-time homebuyer expenses.
Benefits of a Retirement Plan-to-Retirement Plan Rollover
If your clients are changing employers, advise them to check with their new employer’s plan administrator to make sure that their new company’s retirement plan accepts rollovers from other plans. Some plans do not. If they decide to roll over retirement plan assets to their new employer’s retirement plan, these assets will also remain tax-deferred until they withdraw them, as with an IRA. Your clients might consider other factors, as well.
- Rolling over their existing retirement plan assets into their new employer’s plan can make it easier for them to track and manage their investments. Everything is under the same savings umbrella.
- Retirement plans may offer lower fees on investments and other transactions when compared with IRAs.
- Keeping assets in an employer-sponsored retirement plan may give more protection from their creditors.
How to Move Retirement Plan Assets
Your clients can move their assets through either a direct rollover or an indirect rollover.
With a direct rollover, the plan administrator will send a check or electronic payment “for the benefit of” your client but in the name of your financial organization or the new retirement plan. Normally, if a client must take a required minimum distribution (RMD) from the plan, the plan administrator will distribute the RMD to the client, and the rest of the eligible assets will be sent in the rollover.
NOTE: All RMDs due in 2020 are waived. If your clients withdrew a waived RMD in 2020, they have until the later of August 31, 2020, or 60 days after the distribution to roll over that amount. Future guidance may further extend this deadline.
With an indirect rollover, the plan administrator will distribute plan assets directly to your client, withholding 20% of pretax assets as a prepayment of federal income tax. A rollover to a new IRA or plan must happen within 60 days following the receipt of the asset, or taxation (and possibly penalties) may apply to the distribution.
Remind your clients that this is their money. The rollover decision is important, with many factors to consider. But people move their retirement assets all the time, and it’s a relatively simple process. Your clients should carefully review the fees and investment options associated with each rollover option. And encourage them to talk with someone they trust — someone who has their best interests in mind.