Unfortunately, there is no one-size-fits all template that can be used to determine which option is best for a person. Each persons retirement plan must be evaluated individually, based on its own merit and the persons specific situation.
There are numerous variables to consider. These include fees, available investments, services provided, the 10% early distribution penalty, creditor protection, convenience, required minimum distributions and estate planning.
The ability to roll over is not limited to participants in the company plan.
A spouse who is a beneficiary can roll over inherited company plan funds to his or her own traditional or Roth IRA. Non spouse beneficiaries can directly roll over inherited plan assets to an inherited IRA (or directly convert the inherited plan to an inherited Roth IRA).
Probably the strongest argument for an IRA rollover is the ability of a beneficiary to stretch the money for years, keeping it growing in either a tax-deferred traditional IRA or tax-free in a Roth IRA. A non spouse beneficiary can stretch distributions on an inherited IRA over his or her life expectancy.
But many company plans do not allow the stretch option.
Another advantage to a rollover is that IRAs are more flexible than company plans in terms of estate planning and investment choices. IRAs offer the option of splitting accounts and naming several primary and contingent beneficiaries. Individuals can name anyone they wish as their IRA beneficiary.
In many company plans, a participant must name his or her spouse as beneficiary unless the spouse signs a waiver.
In an IRA, individuals can customize investment choices. In addition, investment changes can be made faster in an IRA because there is usually not as much bureaucracy as in a company plan.
Another attraction of a rollover is that it is much easier to access funds in an IRA than in company plans.
Another potential appeal is that an IRA can be a convenient place for a person to consolidate all retirement funds.
IRAs can be aggregated for calculating RMDs. The employee usually has to take his RMD from each company plan separately.
STAY WITH A COMPANY PLAN
If a person is interested in delaying RMDs as long as possible, continuing with the company plan may be a good idea because of the “still-working” exception that may apply. The individual may be able to delay the required beginning date until April 1 of the year after he or she retires. This rule does not apply to IRAs.
At the other end of the time spectrum, individuals who may need their retirement funds early should also give serious consideration to sticking with the company plan. If a person is at least 55 years old when he/she leaves their job, and he/she needs to tap retirement funds, distributions from the company plan will be subject to tax but no 10% penalty. But, if the funds are rolled to an IRA, withdrawals before age 59 ½ will be subject to the 10% early withdrawal penalty. The age 55 exception does not apply to IRA distributions.
For some people, creditor protection may be a concern. Company plans have an advantage here, as they receive federal creditor protection. State laws protect IRAs, and they can vary significantly.
An IRA cannot be invested in life insurance, but life policies can be held in a company plan. For some people, the life insurance offered through their company plan may be the only such coverage a person can qualify or pay for.
If a lump-sum distribution from a company plan includes highly appreciated company stock or bonds, a person may roll it over to an IRA, but he/she may not want to. Under a special rule, the participant can withdraw the stock from the plan and pay regular income tax on it, but only on the original cost to the plan and not on what the shares are worth on the date of the distribution.
The difference is called the net unrealized appreciation (NUA). A person can elect to defer the tax on the NUA until he/she sells the stock. When he/she does sell, he/she will pay tax only at his/her current long-term capital gains rate. The ability to use the NUA tax break is lost if the stock is rolled to an IRA.