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Retirement accounts

Rollover Individual Retirement Accounts (IRAs)

If you have a retirement plan account with a former employer, you have choices for what to do with the assets, including:1

 

  1. Leave the assets in your former employer’s plan
  2. Withdraw the assets in a lump-sum distribution2
  3. Roll over all or a portion of the assets to a traditional IRA
  4. Move the assets to your new employer’s retirement plan
  5. Convert all or a portion of the assets to a Roth IRA

 

Each has different advantages and disadvantages in terms of investments, fees, withdrawal rules, required minimum distributions, taxes and protection from creditors. A Merrill Lynch Wealth Management Advisor can review these choices with you in the context of your goals and financial situation to help you decide what might be appropriate for you.

Leave the assets in your former employer’s plan

Pros

  • Access to familiar investment choices
  • Likely lower costs
  • Broad protection from creditor claims under federal law
  • Preserve tax-deferred growth potential
  • If between 55 and 59½, may be able to take early withdrawals free of the 10% additional tax

Cons

  • Investment choices may be limited
  • Plan rules on distributions and beneficiary distribution choices may be restrictive
  • Can’t make new contributions or take loans
  • The Required Minimum Distribution (RMD) rule applies if assets are left in a former employer's plan3

Withdraw the assets in a lump-sum distribution2

Pros

  • Immediate access to the assets
  • Choose how you spend or re-invest the assets

Cons

  • Taxes will reduce the amount you receive5
  • Cannot put assets back into former employer’s plan
  • Less opportunity for potential tax-deferred future growth

Roll over all or a portion of the assets to a traditional IRA

Pros

  • Potential for future tax-deferred growth
  • Can make new contributions to rollover IRA6
  • Typically more investment choices and planning tools
  • Access to investment advice

Cons

  • Limited opportunity for early withdrawals without paying a 10% early-withdrawal additional tax (early tax is not due for amounts rolled over)
  • Loans are not available
  • Protection from creditors in bankruptcy only
  • Additional fees should be considered when moving assets to an IRA (for example, transfer fees may apply)

Move the assets to your new employer’s retirement plan

Pros

  • Access to potentially new investment choices
  • Avoid immediate taxes and a potential 10% early-withdrawal additional tax
  • Broad protection from creditor claims under federal law
  • Preserve tax-deferred growth potential
  • May not have to take Required Minimum Distributions if you are still working3,4
  • May be able to take a loan7

Cons

  • Some plans don’t allow rollovers7
  • There may be waiting periods or other restrictions7
  • Investment choices may be limited

Convert all or a portion of the assets to a Roth IRA

Pros

  • Withdrawals of contributions are federal income tax-free (taxes are paid at time of contribution)
  • Qualified withdrawals of any earnings8
  • Able to pass potential earnings to heirs federal income tax-free4,9
  • Original account owner doesn’t have to take Required Minimum Distributions (RMDs)4,9
  • Potential hedge against rising taxes

Cons

  • Income taxes paid when you convert the assets
  • Loans are not available
  • Limited opportunity for early withdrawals
  • Protection from creditors in bankruptcy only
  • Additional fees should be considered when moving assets to an IRA (for example, transfer fees may apply)

The choice is yours and we’re here to help

Ultimately, your choice depends on your financial situation, goals and priorities. A Merrill Lynch Wealth Management Advisor can help you understand how your choice can help meet your retirement goals.

 

Things to consider:

  • Do you fully understand the choices available to you for assets in a former employer’s retirement plan?
  • Have you discussed the choices with your tax advisor?
  • If you don’t use all the assets during your lifetime, would you like to make them part of the legacy you leave behind?

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Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.

 

You have choices for what to do with your 401(k) or other type of plan-sponsored accounts. Depending on your financial circumstances, needs and goals, you may choose to rollover to an IRA or convert to a Roth IRA, rollover a 401(k) from a prior employer to a 401(k) at your new employer, take a distribution, or leave the account where it is. Each choice may offer different investment options and services, fees and expenses, withdrawal options, required minimum distributions, tax treatment, and provide different protection from creditors and legal judgments. These are complex choices and should be considered with care.

1 Some rollover choices may not be available with respect to Roth employer plan assets.

 

2 If any portion of your employer plan account balance is eligible to be rolled over and you do not elect to make a direct rollover (a payment of the amount of your employer plan benefit directly to an IRA), the plan is required by law to withhold 20% of the taxable amount. This amount is sent to the Internal Revenue Service as federal income tax withholding. State tax withholding and a 10% early-withdrawal additional tax also may apply. If you timely complete an indirect rollover, you can work with your tax advisor to obtain a refund from the IRS when you file your tax return for the taxable year.

 

3 A Required Minimum Distribution (RMD) is the minimum amount the account holder of a traditional IRA or qualified retirement plan must withdraw annually. If you are age 70½ or older as of December 31, 2019 you are required to take an RMD for the 2019 tax year. Effective January 1, 2020, in accordance with new legislation, the required beginning date for RMDs is now raised to age 72. The RMD can be taken any time during the year but no later than December 31st. You may defer your first RMD until April 1st of the year after you turn age 70½ or 72, as applicable, however you will then be required to take two distributions within that year. Failure to take all or part of a RMD results in a 50% additional tax applicable to the amount of the RMD not withdrawn.

 

4 Under the CARES Act, all 2020 RMDs have been waived. There are no coronavirus eligibility requirements associated with this change. For 2020 distributions that were RMD payments prior to the law change, the following relief is available to restore these funds to a plan or IRA: 2019 RMDs that were not taken before January 1, 2020 and that were required to be taken by April 1, 2020 are also waived; distributions received as RMDs in 2020 are eligible for rollover; the 60 day rollover period for distributions that would have been RMDs but for the CARES Act waiver taken after December 31, 2019 and prior to July 2, 2020 has been extended to August 31, 2020; distributions taken after July 1, 2020 are subject to the regular 60 day rollover rule; for IRAs, waived RMDs taken from beneficiary accounts may be recontributed to the distributing inherited IRA account by August 31, 2020. The one-rollover-per-year rule applicable to IRAs does not apply to the repayments of these RMDs to the distributing account by August 31, 2020. Consult your tax advisor for more information on your personal circumstances.

 

5 Distribution subject to immediate 20% federal tax withholding, plus applicable state tax and possibly a 10% early-withdrawal additional tax if you are under age 59½ or under age 55 and separated from service. You may owe additional taxes when you file your income tax return with the IRS.

 

6 If eligible.

 

7 Contingent on specific plan rules.

 

8 Distributions from a Roth IRA are not subject to federal income tax, provided you have satisfied a five-year holding period and at least one of the following applies: (i) you are 59½ or older; (ii) you are a qualified first-time home buyer (lifetime limit of $10,000); (iii) you are disabled; or (iv) the distribution is a payment after your death to your beneficiary or estate.

 

9 Original Roth IRA account owners are exempt from taking Required Minimum Distributions (RMDs). Beneficiaries are required to take RMDs from inherited IRAs. A spouse beneficiary may elect to treat an inherited Roth IRA as his or her own and would not have an RMD requirement during his or her lifetime.

 

This material does not take into account a client’s particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security or investment strategy. Merrill offers a broad range of brokerage, investment advisory (including financial planning) and other services. There are important differences between brokerage and investment advisory services, including the type of advice and assistance provided, the fees charged, and the rights and obligations of the parties. It is important to understand the differences, particularly when determining which service or services to select. For more information about these services and their differences, speak with your Merrill Lynch Wealth Management Advisor.

 

Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

 

If you open an Individual Retirement Account (IRA) with us, depending on the services you choose, Merrill Lynch, Pierce, Fenner & Smith Incorporated will act in the capacity as an investment advisor or a broker, and our role and obligations will vary as a result.

 

Merrill Lynch, Pierce, Fenner & Smith Incorporated (also referred to as “MLPF&S” or “Merrill”) makes available certain investment products sponsored, managed, distributed, or provided by companies that are affiliates of Bank of America Corporation (“BofA Corp.”). MLPF&S is a registered broker-dealer, registered investment adviser, Member SIPC and a wholly owned subsidiary of BofA Corp.

 

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