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Many of us have assets in IRAs, 401(k)’s, and other types of retirement plans. Often questions turn on what to do with those assets. Leave them where they are? Convert them to something else? Lots of those decisions center around the person’s individual and tax situation. Do I pay taxes now or later? When do I need to
access the money, if ever? And, with recent positive changes in the law, it may make sense to consider rolling over those qualified assets to other vehicles and/or converting your IRAs, 401(k)’s etc. to Roth IRAs. To that end, lets examine why you may want to rollover and convert, given several different scenarios.
First, why should I roll over IRAs to Qualified Plans (like 401(k)’s) etc.?
One good reason would be creditor protection. A section of the law can protect qualified plan assets from the claims of private creditors. Other than court orders for family/child support known as Qualified Domestic Relations Orders (QDROs) and tax levys imposed by the IRS, it’s very difficult for creditors to access qualified accounts. For IRAs, general creditor protections vary by each state and are usually are not as good as the protections in qualified plans.
In federal bankruptcy proceedings, qualified plan assets are exempt, while regular IRA and Roth IRA protection is only available up to $1,000,000. However, for qualified plan assets that have been placed into a rollover IRA account, those assets do not have a $1,000,000 cap and are fully exempt from bankruptcy as well.
Lets say you want to borrow money. In qualified plans, if allowed by the plan assets can be used for plan loans, which are not allowed in IRAs.
If you need life insurance coverage and if allowed by the plan, you can use qualified plan assets for larger life insurance premiums, particularly in qualified profit sharing plans where certain rules permit a larger portion of the assets for insurance premiums. However, Life Insurance is not allowed in IRAs.
If you are in a qualified plan but don’t own at least 5% of the business you work for, required distributions aren’t required until the LATER of age 70 ½ or actual retirement, while in IRAs (except Roth IRAs where there are no minimums required) they must begin at 70 ½, even if you are still working.
Also, if someone dies and the surviving spouse is older than the decedent, and the object is to delay distributions as long as possible, it is ok to leave the assets in the plan until the decedent would have been 70 ½ had he/she lived, which further delays the start of any required distribution.
For qualified plans and 403(b) accounts (not IRAs) there is an exception to the 10% penalty tax for premature distributions provided you first attain the plan’s early retirement age (which can’t be earlier than age 55), THEN you separate from your employer. All distributions coming out of the plan in whatever manner are not subject to the 10% penalty.
All the above reasons may also be relevant for spouses who receive distributions at death and who have the option of rolling over these assets into their own qualified plan as well as to their own IRA.
Second, why should I roll over Qualified Plans into regular IRAs?
Some plans may force distributions at retirement or some other time, which is not true with IRAs. Also, you may want the ability to choose and diversify investment vehicles and access the assets at any time. IRAs offer that level of control.
Interestingly, the following 10% Premature Distribution Penalty Tax exceptions only apply to IRAs and not to qualified plans:
Medical Expenses in excess of 7.5% of your Adjusted Gross income
Health insurance premiums for unemployed individuals
Qualified Higher Education Expenses
Qualified First Time Homebuyer Distributions
So, if you need any of them, and if the qualified plan allows, move over to the IRA!
Finally, why should I convert Qualified Plans and regular IRAs into Roth IRAs?
There are many good reasons here. If you want to pass assets tax free to succeeding generations; are concerned with higher tax rates even after retirement; if you want to delay required distributions after age 70 ½. and/or if you want to keep taxable income down from Roth distributions to offset other taxes due, then a conversion to a Roth IRA may be for you. Remember that at the time of conversion you pay tax on the amount converted, but later distributions are totally free of income tax.
And, for conversions occurring only in 2010, you pay no tax on your 2010 tax return. Instead, you pay half the tax due on your 2011 tax return and the rest on your 2012 return. For example, if I convert $100,000 from a regular IRA to a Roth IRA, I pay no income tax on my 2010 federal tax return. Instead, I pay tax on half the amount ($50,000) on my 2011 return and the other half ($50,000) on my 2012 return. Conversions occurring
In all other years require that all the tax be paid in that year.
Lots of good planning ideas to think about. With assistance from your financial advisor, choose the approach that best suits your retirement and planning needs!
The views and information contained herein have been prepared independently of the presenting Representative and are presented for informational purposes only.
This information is not intended as tax or legal advice. Please seek the advice of a professional advisor prior to making any decisions regarding your own situation.
TC52683(1009)
Gary R McCarty 
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