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Retirement Strategies
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Six Questions to Ask Before Rolling Over a Retirement Account

Explore these possibilities before initiating the transfer

Many advisors conduct retirement plan rollovers. But casually and carelessly moving all of the money from a client’s 401(k) or 403(b) to a self-directed IRA can mean lost opportunities, higher taxes, and unnecessary costs to the client.

Before you initiate a transfer from a client’s at-work retirement plan to an IRA under your management, consider these questions:

1. Is there any company stock?

A soon-to-be-retired employee who owns highly appreciated company stock within a tax-sheltered retirement plan has a tremendous opportunity to reduce the taxes that would otherwise be due upon a typical distribution.

The potential break comes from a special exemption known as “net unrealized appreciation,” or “NUA.”

First, the client would take an in-kind distribution of some or all of the company stock. The cost basis of the distributed stock is taxable to the client at the time of distribution, and is taxed as ordinary income.

At a minimum, you may want to wait until the client is retired and in a lower tax bracket to initiate the in-kind distribution of the stock. 

Also, since an additional 10 percent penalty may apply to the cost basis amount if the client is under age 59 ½ at the time of distribution, it might make sense to leave the stock in the current at-work plan at least until the client reaches that age.

Once the stock has been distributed in kind from the retirement plan, it can be sold at any time. The difference between the original cost basis of the stock and the sales proceeds is taxed at favorable long-term capital gains tax rates.

Ideally, you and the client will be able to delay the sale of the stock until the client can make the sale and still stay below the top of the 15 percent federal income-tax bracket. Then the federal long-term capital gains tax rate on the sale will be zero.

2. Are some investments irreplaceable?

Many employer-sponsored retirement plans offer “stable value” accounts, or fixed-rate annuity investment options.

Depending on the interest rate paid and the discernible strength of the investment provider, it may be impossible for you to duplicate the safety, liquidity and yield the client could earn on these relatively conservative options.

Therefore, it may be better to leave an appropriate portion in the plan and in these accounts, and invest the rest in complementary vehicles in the client’s self-directed IRA.

3. Will they need the money in their 50s?

If clients might need to tap retirement accounts before turning 59 ½, they may pay a 10 percent penalty if they pull the funds from an IRA. 

It’s possible to dodge the penalty if they use the complicated “substantial equal payments” strategy, or use the funds for a limited number of qualified expenditures. But if they leave some money in their at-work retirement plans, they may be able to avoid the penalty completely regardless of the reason.

Withdrawals from 457(b) plans are considered taxable income, but are not subject to the 10 percent early withdrawal penalty, regardless of the owner’s age.

401(k) and 403(b) owners who are at least 55 and have separated from their employers can also make penalty-free withdrawals from their accounts for any reason.

4. Any after-tax contributions?

Retiring or separating employees with after-tax contributions to at-work retirement plans can roll that portion of the account into a Roth IRA—tax-free.

But the clients can only roll over the entire after-tax portion to the Roth IRA if they are rolling over all of the rest of their retirement account assets as well. Otherwise, the portion of any partial withdrawal moved tax-free to a Roth IRA has to represent the same ratio of after-tax contributions to pre-tax contributions.

For instance, if a client has a $500,000 401(k) and $100,000 of that account represents after-tax contributions, only 20 percent of any partial distributions can be moved tax-free to a Roth IRA.

5. Is a conversion to a Roth IRA feasible?

When a client is ready to roll an at-work retirement plan to an IRA, it usually means she is either going to retire or be unemployed, and therefore likely won’t have much if anything in the way of taxable income. Seize this opportunity to convert a portion of her pretax retirement plan to a Roth IRA, especially if you can keep her taxable income (including the converted amount) below the top of the 15 percent federal income-tax bracket.

Taxable income is displayed on Line 43 of the client’s 1040 tax form, and for 2015 the top of the 15 percent tax bracket is at $37,450 for singles, and $74,900 for married couples filing jointly.

You can use the tool at to calculate how converting various amounts will affect your client’s taxes and tax rate.

And of course, if it turns out that the conversion made in a particular year generates a bigger tax bill than the client would prefer, the conversion can be reversed by April 15 of the subsequent year (or Oct. 15 if the client files for an extension).

6. Can they now make IRA or Roth IRA contributions?

You probably already contact your working clients in the first part of the calendar year to see if they are interested and able to make contributions to IRAs or Roth IRAs for the prior tax year. But don’t forget about clients who have retired in the previous year.

Since the recent retirees only earned a partial year’s salary, they may be eligible to make Roth IRA (and spousal Roth IRA) contributions that would have otherwise been prohibited by a higher, full year’s worth of earnings.

Better yet, if their modified adjusted gross income figure is low enough, they may be able to make contributions to tax-deductible IRAs (and spousal IRAs), even if they contributed to a plan at work during the previous year.

You can verify if the clients are eligible to make an IRA or Roth IRA contribution by running it past their tax preparer, or see Publication 590-A at

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