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Rollover Advisor

Your 401k is one of the most significant assets you own. Deciding what to do with it when you leave your employer is a critical financial decision.

To help with this decision, the U.S. government has been on a ten-year quest to develop a regulatory scheme that protects retirement plan participants. While many of the rules involve advice, when someone is in the plan, a primary focus is the direction a financial advisor provides on whether you should roll your 401k to an IRA.

The Fiduciary Rule

The first such attempt happened in 2010 when the Department of Labor (DOL) proposed sweeping changes to the retirement landscape with their so-called Fiduciary Rule.

The proposal required financial advisors to act in the retirement plan participants’ best interests, including advising someone on whether they should roll their 401k into an IRA.

It barely got off the ground before the 5th Circuit Court of Appeals canceled it on March 15, 2018, when it ruled that the Department of Labor overstepped its bounds.

Read More: DOL Fiduciary Rule Timeline & Updates


In addition to sweeping bank reforms, the 2010 Dodd/Frank bill tasked the SEC with reviewing the two regulatory silos that financial advisors come under to merge the two into one possibly.

You might be surprised that there are two silos. The first is for broker-dealers who worked under a suitability standard. The second is for investment advisors who, in addition to suitability, are fiduciaries who owe their clients a higher loyalty.

The New Rule from the SEC

Beginning June 30, 2020, broker-dealers began operating under a new standard called Regulation Best Interest. This requires brokers to better align their interests with those of their clients by eliminating conflicts of interest, such as proprietary product requirements, sales quotas, or sales contests.

Registered representatives (brokers) will be called financial professionals. Any advisors who are fiduciaries can continue calling themselves financial advisors.

The DOL Resurfaces

The financial industry had just adapted to the new SEC rules when on July 7, 2020, the Department of Labor issued a final rule to close the circle, begun by the 2010 Fiduciary Rule and the new SEC best interest rule.

The DOL rule brings back the five-point test to determine if an advisor is a fiduciary.

  1. The financial advisor must render advice as to the value of securities or other property;
  2. The advisor must do so regularly;
  3. The advisor must do so under an agreement with the client;
  4. That advice will serve as a primary basis for the client’s investment decisions; and
  5. The recommendation is to be based on the particular needs of the investment or retirement plan.

It also withdrew guidance from the so-called Deseret Letter. The DOL had opined that rollover recommendations were not fiduciary investment advice in that guidance.

The DOL sent the final rule to the Office of Management and Budget in December. Because of the administration change, the rule will be put on hold and eventually modified or canceled.

Read More: Fee Only or Commission What’s Better for You?

Rollover Advisor
Rollover Advisor

So Back to the Question: Should You Roll Over Your 401k?

As you can see, the government is concerned that people that roll a 401k to an IRA end up paying higher fees. And if you have a plan with institutional share classes, work with a financial advisor, and move your plan to an IRA, your costs will likely go up.

But many 401k plan participants work for employers that do not offer institutional pricing nor a great fund lineup. For them, they can roll over without incurring higher expenses and maybe end up with better choices.

Read More: Do You Have After-Tax Money in Your 401k?

There are other reasons to do a rollover besides costs: convenience, not having to deal with the plan for withdrawals, beneficiary changes, or other housekeeping changes.

Also, the skill set involved in growing your accounts is different from providing income. Maybe you will find a financial advisor well-schooled in bonds, annuities, dividend stock funds, the tools needed to generate retirement income.

The advisor could also provide additional services such as estate planning. They can keep you abreast of vital rule or law changes, such as the recent change that made having a trust as a beneficiary in a retirement account less appealing.

Read More: Should You Have a Trust as Beneficiary on Your Retirement Account?

Rollover Advisor
Rollover Advisor

Inheriting an IRA

The worst part of being a financial advisor is seeing a client pass away. Last year was especially tough for me, as two long-time clients of mine passed away.

It is difficult to talk with beneficiaries, some of whom I meet for the first time after they suffer such a terrible loss. I can do my small part by making sure that my client’s beneficiary designations are in order, and when the time comes, I can help the beneficiaries through their maze of options.

For example, when someone inherits an IRA, the particular relationship between the individual who passed away and the beneficiary dictates the available choices. When the spouse is the sole beneficiary, that person can either remain a beneficiary or become the owner of the IRA.

To avoid paying the 10% penalty on withdrawals, spouses under the age of 59½ who need access to the IRA should consider remaining a beneficiary, as any withdrawals made by beneficiaries are exempt from the penalty. If it makes sense to become the owner in the future, they can always do so at a later date.

Spouses over 72 should also consider remaining beneficiaries. When they reach that age, the government requires the IRA’s owner to begin taking distributions from it. For example, if a spouse passes away at 65, and the surviving spouse is over 72, then, by remaining a beneficiary, the surviving spouse has a six-year window before they are required to take a distribution because they are using their spouse’s age.

Spouses are the only beneficiaries who can become owners. They can move the inherited IRA into their own IRA, 401(k), or 403(b). Just remember: If a spouse becomes the owner, then that person’s age becomes the yardstick that determines whether a withdrawal is subject to the 10% penalty. The age also determines when distributions are required to take effect. This could benefit a younger spouse who wants to put off distributions for as long as possible.

The least likely choice for spouses is to disinherit the IRA, thus becoming neither owner nor beneficiary. This might happen in a wealthy family in which the spouse does not need additional taxable income but instead wishes to change places with the contingent beneficiary and provide withdrawals over a longer period to the children or grandchildren.

When anyone other than a spouse inherits an IRA, that person’s only choice is to be a beneficiary. In that case, recipients must make a trustee-to-trustee transfer of the inherited IRA, and make sure to title the new IRA in the deceased owner’s name for the benefit of themselves as a beneficiary. This is used to provide recipients the option of stretching the withdrawals out over their lifetimes, hopefully lessening the tax burden.

However, the Retirement Secure Act pushed back when stating that an IRA holder must begin taking distributions from age 70 1/2 to 72. It also decreased the time a non-spouse must distribute any inherited IRAs from over their life down to ten years.

Under the new law, a non-spouse beneficiary who is ten years younger than the previous IRA owner must withdraw the account by year ten. However, they don’t need to take annual distributions.

What About Current Beneficiaries?

Beneficiaries taking RMDs based on the previous rules can continue using the old law, but the non-spouse recipient of someone who passes away post-January of 2020 will be under the new regulations—making this a good time for 401k, 403b, or IRA retirement plan owners to review their current beneficiaries as well as any trusts with your attorney.

Rollover Advisor
Rollover Advisor

Do You Have After-Tax Money in Your 401k?

Do you happen to have after-tax money in your 401k or 403b, assuming the fees and expenses in the IRAs are comparable to the 401k or 403b? A rollover might be beneficial.

In Notice 2014-54, the IRS provided the option for an individual to roll over their pre-tax retirement money into an IRA while rolling over their after-tax money into a Roth IRA.

If left in the plan, future earnings from the after-tax investments are withdrawn as taxable distributions. However, if rolled into a Roth IRA, those earning start growing tax-free.

Read More: Should You Roll Over Your 401k to an IRA?

The Secure Act

The Secure Act requires children, grandchildren, and any non-spouse beneficiary ten years younger than the IRA owner to withdraw the entire inherited IRA or retirement plan in ten years. They no longer have the option of stretching the withdrawals over their lifetime.

The Secure Act, however, keeps the rules the same for spouses. They can still roll the plan over into their IRA, become the IRA owner, or remain an IRA beneficiary.

Read More: How the New Retirement SECURE Act Impacts You

Beneficiary Planning

A potential planning strategy, depending on how much after-tax money is in the 401k, is to roll the after-tax to a Roth IRA, maybe leaving that for the kids. You can reasonably invest in that account aggressively. The Roth grows tax-free, and the beneficiary can withdraw without incurring taxes. (The IRA owner also can withdraw tax-free.)

The one downside is that you must wait five years to make a total penalty-free withdrawal from the Roth account. However, you can withdraw the after-tax rolled-over amount at any time without penalty, as only the gains are subject to a 10% penalty.

No Minimum Distribution

Most people with after-tax money in their 401k typically have a significant account balance.

One usually does not contribute after-tax until they have used up all their pre-tax contribution limit.

So, even if one does not intend on leaving money to someone ten years younger, there are still benefits. There is no minimum distribution required from a Roth IRA, meaning the money can stay in the account longer and be invested more aggressively. All withdrawals are tax-free.

Federal Government Rules

The federal government has instituted a series of rules and laws to help participants with that decision. The first law, from the U.S. Department of Labor, puts an increased requirement on financial advisors who recommend that participants roll their money over.

The other, from the Securities Exchange Commission, requires an advisor to work in the best interest of the retirement plan participant.

If you have after-tax money in your plan, the benefits of a rollover increase.

Please be sure to speak to your advisor to consider the differences between your company retirement account and investment in an IRA. These factors include, but are not limited to, changes to the availability of funds, withdrawals, fund expenses, fees, and IRA-required minimum distributions

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