By Robert L. Warner, Managing Director – The Pilot Program, Johnson Financial Group
This article is part of a continuing series of articles about retirement planning.
Mergers and acquisitions are an ever present reality in business. The headlines often focus on the financials of the business transaction, but the financial impact on individual employees can be just as important. While employees may initially react with concern about the future, once the dust settles, some may find a change in ownership creates a unique retirement planning opportunity which simply would not exist in the absence of a sale.
In a merger or acquisition, companies generally terminate the former employer‐sponsored retirement plan. When this occurs, employees typically have three broad choices for their former retirement plan assets: roll the assets into an IRA, transfer the assets to the new employer‐sponsored plan or take a lump sum distribution. Each of these choices has benefits and restrictions worth considering.
Rolling your retirement assets into an Individual Retirement Account (IRA) is a two‐step process. First you select an appropriate financial services firm to create an IRA account. Then complete distribution paperwork properly to “roll” the account from the 401(k) to the IRA. An IRA account creates an opportunity to gain greater control over investment choices and opens up a much larger set of investment vehicles from individual stocks, any sector of the public bond market, thousands of mutual funds, exchange traded funds and separately managed accounts. We'll cover more of the unique opportunities and pitfalls of IRA accounts in a later post.
Transferring your retirement assets into the new employer‐sponsored plan is another alternative, and often viewed as the simplest option. Just as in the IRA approach, this option also avoids any immediate taxation and preserves the tax deferred nature of your retirement funds. An employer‐sponsored plan offers significant creditor protection, and may also offer useful benefits such as loan provisions and hardship withdrawals. Many people consider transferring to the employer‐sponsored plan simply because it is the most convenient option.
But convenience comes at a price. Employer‐sponsored plans rarely offer the flexibility of investment options available in an IRA. Many people find enrolling in the new employer‐sponsored plan is a convenient way to continue to build their retirement portfolio, but having a separate IRA also creates flexibility. You are never obligated to transfer your retirement assets from your old employer plan to the new employer plan.
A lump sum distribution is often offered when a plan is terminated. Though tempting, sound financial planning suggests this option is rarely in your long‐term best interest. A lump sum distribution creates three important consequences. First, the entire amount is immediately subject to income taxation and if you are younger than 59‐1/2 years old, an additional tax penalty. Second, the tax deferred nature of your retirement assets is now lost, which can have significant impact on your retirement income potential. Finally, the significant creditor protection available in an IRA or employer‐sponsored plan will be lost. Those funds are now available to creditors should you encounter a personal financial crisis.
Engaging an experienced financial professional can help you navigate the decision‐making process for your retirement plan assets. An effective advisor should help estimate your future retirement income needs and help determine how to allocate your retirement assets to meet those needs. The decision comes down to a personal choice. However, many recognize this can be an opportunity to gain additional control over investment selection and create more investment choices. By working with an experienced investment advisor, those choices become much more manageable.
Johnson Financial Group and its subsidiaries do not provide tax advice. Please consult your tax advisor with respect to your personal situation. Wealth management services are provided through Johnson Bank and Johnson Wealth Inc., Johnson Financial Group companies. Additional information about Johnson Wealth Inc., a registered investment adviser, and its investment adviser representatives is available at https://www.adviserinfo.sec.gov/. NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE