27 Jan Rolling over a retirement plan
Q. I have a deferred compensation fund. I recently retired. One of the options is to roll over the fund into an IRA. What are the benefits and consequences?
A. There are a few different versions of a deferred compensation plan.
You didn’t say which you have, but we’re going to assume you’re talking about a 457 deferred compensation plan, which is like a 401(k).
There are also nonqualified deferred compensation (NQDC) plans, said Jeff Rossi, a certified financial planner with Peak Wealth Advisors in Holmdel.
Rossi said NQDCs are typically used for executives because they allow a highly-compensated employee to defer much more of their income than a 401(k) or 457 plan, which limit contributions to $18,000 in 2016, plus an additional $6,000 per year if you are at least age 50.
A 457 plan is established by state and local government and tax-exempt employers for employees to defer compensation on a pre-tax basis, Rossi said.
“If you’re recently retired, one of the benefits of 457 plans won’t be valuable to you anymore, which is the ability to make withdrawals from the plan before the age of 59 ½ without incurring a 10 percent penalty in certain circumstances,” Rossi said.
457s also allow you to essentially double the max contribution amount within the last three years before retirement, creating an opportunity to defer a lot of more cash than you could in a 401(k).
If you’re already retired, and assuming that means you’re past the age of 59 ½, there are no real consequences to rolling your deferred compensation monies into an IRA.
The benefits depend on your situation.
“Your situation also might benefit from converting assets to a Roth IRA, which would first require moving the asset into a rollover IRA from the deferred compensation plan,” Rossi said. “If it makes sense to incur the tax hit to convert to a Roth IRA, you’ll benefit from tax-free growth and no requirement to take RMDs at 70 ½.”
Rossi said another potential benefit favoring the rollover — and it’s a significant one — is the access to the right types of low-cost investments to support your retirement.
“If you can cut costs and diversify better in an IRA versus what’s available in the deferred compensation plan, and prop up your expected returns throughout retirement, you can wind up with more money in your pocket, or what you leave to your heirs,” Rossi said.
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This story was first posted in January 2016.NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.