Ask an Expert: Retirement Rollovers

Is it usually beneficial to roll over money from an employer plan to an IRA?

Generally, yes.  This is especially true if the adviser acts as a fiduciary and utilizes institutional funds with a long-term asset class investment approach. Unlike an individual retirement account (IRA), employer plans typically offer limited investment opportunities, especially among the various asset classes.

Unlike the early days of the IRA, today an IRA has substantially similar asset protection planning features found with employer-sponsored plans.  Additionally, the distribution options available under an IRA following one’s death are usually more flexible for beneficiaries than employer-sponsored plans.

Should I look to annuities for my retirement account?

Almost always, no.  A retirement account is the same as any other investment account, except for the tax benefits provided by the Internal Revenue Code. Therefore, a retirement account is by its very nature a tax-friendly account.  Selling annuities to a retirement account holder is like selling ice on the North Pole.

Annuities are sold to the investing public as tax-friendly vehicles when in reality they are tax-nasty.  Upon distribution, annuities take what would have been favorable long-term capital gains rates and convert them to the usually higher ordinary income tax rates.  As if this tax increase were not challenging enough, annuities usually have very high annual internal costs, plus mortality and expense charges.  These taxes and various fees create a significant drag on investment performance.  In addition to increased taxes and high fees, an annuity usually has a very high surrender charge to cover commissions to brokers that can be as high as 10 percent or more of the value of the annuity due upon sale within several years of purchase.  An annuity is an insurance product, not an investment.

I bought an annuity (and/or whole life or other cash value life insurance product); how can I get out of it without tax consequences?

Long ago, Congress recognized that many insurance purchasers regret their annuity or cash value life insurance purchases and want to exchange out of them into other tax-deferred vehicles.   Section 1035 of the Internal Revenue Code permits a “like-kind” exchange of annuities and cash value life insurance into other investment vehicles, usually of substantially lower costs than the products that they are exchanging out of.  Of course, this does not rid one of the surrender charges; however, it is often beneficial to take the surrender charge and enjoy an improved allocation at lower cost rather than continue with a high-cost vehicle waiting for the surrender charge to expire.

I am a teacher with TIAA-CREF; do you recommend that I also look at other investment vehicles upon retirement?

Yes.  As with most investment vehicles, TIAA-CREF has many good products that your adviser can continue to work with; however, there are many other asset classes that can be added to significantly improve your portfolio’s long-term risk and return profile.  Working with a fee-only investment adviser using other institutional funds can help optimize your portfolio beyond the standard arrangements offered by TIAA-CREF.

I am a few years from retirement; when should I seek the advice of an independent advisor?

It is always a good idea to start retirement planning early.  Often it is best to work with independent advisers in addition to your company’s benefits department.  The key is to make certain that your advisers are truly independent.  While many advisers hold themselves out as “independent,” only a fee-only (not merely fee-based) adviser is truly independent of commissions and conflicts of interest.  A fee-only adviser can either work with your existing retirement plan during the accumulation phase (i.e., while you are working) or make important recommendations for current allocations among your employer’s limited investment offerings.

Additionally, your fee-only adviser can offer guidance in such matters as when to retire based on lifestyle and income needs, and how to protect your family in the event of your disability or death.

What can be rolled over into an IRA?

Almost any retirement plan, with certain limitations, can be rolled over into an IRA.  Examples include: 401(k), 403(b), 457(b), SIMPLE Plans and SEP IRAs.

Stephen L. Hicks, JD, MS, AIF® and Roger L. Millbrook, JD, CPA/PFS, are fee-only fiduciary investment advisers and principals of Siena Capital Management, LLC in Grand Ledge.  Both hold law degrees as well as other advanced degrees and designations in the area of financial services.









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