By: Frank Armstrong, CFP, AIF
After you have considered all the other possibilities, you will most likely find that your best choice for your pension funds is the IRA rollover. Unless you fall into one of the rare situations outlined in the previous sections, the advantages are overwhelming:
- Total control of investment philosophy and execution: It’s a rare investor that can completely construct his optimum portfolio within the confines of a pension plan. An IRA rollover with a discount brokerage house like TD Waterhouse or Fidelity offers thousands of no-load mutual funds, ETF’s, individual stocks and bonds, or other investment options.
- Costs: By divorcing yourself from the plan’s administrative costs, and selecting lower cost funds, you can often save in excess of 2% per year. Those savings will add up to enormous benefits over your lifetime.
- Consolidation: One IRA rollover is a lot easier and more convenient to manage than several little pension plan accounts spread over a number of different custodians each with different fund choices, forms, statements, procedures, contact personnel, account numbers, pin numbers and access codes.
- Access: In a dire emergency, you can access your funds from an IRA without any lengthy approval process or delay. (Of course, you may be subject to taxes and penalty tax for premature withdrawal.)
- Financial Advice: Most retirement plans won’t offer specific financial advice. As the balances grow, you may find that you require professional advice to combine your IRA’s and personal accounts into a comprehensive investment plan.
Accomplishing the rollover:
It’s important to avoid any receipt of the funds that might trigger an unanticipated tax consequence. The “Trustee to Trustee” transfer prevents any possibility of a taxable event occurring during the transfer process. (If you do decide to hire an investment advisor, they will assist you to compete the process.)
- Open an account with the financial institution of your choice. We would suggest a discount brokerage like TD Waterhouse or Fidelity to maximize your investment choices, buy you may wish to use a large no-load fund family like Vanguard.
- After the account is opened give the account number and complete address to your old pension administrator or HR department. Instruct them to send the proceeds directly to the new custodian.
- In the event that you made non-deductible contributions to the old plan, the administrator will send you a check for the amount of your contributions. They cannot be rolled over into an IRA, however, the growth on your contributions can be. Consider investing the check for your contributions in funds that will generate low turnover and tax liabilities, for instance, a total market index fund.
- When the funds have arrived at the new custodian, invest them to meet your long term retirement needs.
- Expect a form 1099R from your old plan. Hold on to it. Even though you don’t have a taxable event, you will need to show the rollover on your next annual tax return.