Alright, everyone. Welcome back to the latest episode of the great retirement debate, Ed. Good to be back with you to argue about something else once again. Yeah. If you've left your job voluntarily or involuntarily, and you have a four zero one k, a four zero three b, a company retirement plan. Should you roll it over to an IRA? Alright. So what say you, Ed? Should you roll it over to an IRA? Let's talk about the involuntary situation. Okay. Layoffs. Back in 2023, over two hundred sixty thousand people. I don't even understand this. In the tech industry, we're laid off You're talking about some of the most valuable companies in the world, Microsoft, Google, Amazon, most profitable, but That happened. UPS laid off people, Citibank, in early January, laid off twenty thousand people. They say that's ten percent of their work for us. So what's happening And this is good times. Yeah. Right. Right. The market's up. Everything's happening. So there are big balances at stake. So people wanna know what to do with these balances. Should I roll them over to an IRA? And especially in the tech sector, I gotta believe a lot of these accounts are heavy balances. And this may be a once in a lifetime decision. You may only have one chance to get this right. Now, most people, even most advisors, sorry to say, the knee jerk reaction is the IRA rollover. Sure. But is that always the best option and take into account what you just said, Jeff, good times? At least early in 2024, the market was way up, and stock values were way up. So maybe there's other factors to consider before you blindly do an IRA role of because once you do that, that's irrevocable. Well, let's talk about what those options are in the first place. Right? So certainly doing nothing is always an option. Leaving money in your existing employer plan is one option that at least most people have. A plan can in theory say you're gone and so is your money and take it with you. But that's very, very rare. Most plans are happy to keep your money. They want your money. That's right. They're near it's a there's a happy to keep it there. Now, certainly, you may go back to work at another company. Right? So you could have the opportunity to move it to a a new plan, maybe a scenario where you just take everything out of the accounts and and take a a distribution of everything known as a lump sum distribution, which get into it a little bit, or you could engage in a a Roth conversion, either in the plan or out of the plan to a Roth IRA. But those are are basically your options along with, of course, the most popular option, which is rolling it over to a traditional IRA. So what let let's start with the idea of, like, should you? Well, why would anybody want to roll money over to a traditional IRA? Why why you said the the idea, at least most advisors, would recommend that more often than not. What are some of the reasons that that might be recommended? I think many times it's because other options weren't considered. Okay. For example, maybe and there are reasons on all of these. Maybe you wanna leave it in the company plan. Why would you wanna do that? Maybe there are creditor issues. You have great creditor protection in a company plan. You have other benefits. Maybe it's the investments, but you should look at all the factors, pro and con, leaving it in the company plan versus the IRA rollover. I almost would say the IRA, If there are no other benefits in these other options, the IRA rollover is the default option. That's fair. That's fair. I mean, when you think about all the different things to consider, I don't know that we have time to get into every one of those nuances today, but creditor protection can be different between plans and IRS like you mentioned. Lots of states have great creditor protection for IRS, but not all. That can be an important difference. You noted there can be difference in investments. There can be differences in fees. There's even potential differences on the tax side. You have different withholding rules for IRS as you do for plans. There are different you can only do, let's say, a QCD, from an IRA. And you can't do a QCD. That's a chart or qualified charitable distribution. That's the ability for someone who's seven and a half or older who is charitably inclined to use IRA money, which is a great asset to give to charity, because it's all pre tax in general, and to move it right to charity without any impact on the tax return. So there are definitely some differences. And again, all of these are things you might either have to research yourself or work with a financial advisor to discuss, but What are some of the times or, I guess, let's go the other way. What would be a reason not to make a rollover? Why would someone choose that that, like, say, hey, I know that most people end up rolling it over, but the reason it's not right for me is because what? Well, let's take you mentioned some reasons to keep funds in a plan. But one of them was the lump sum distribution. Now you might say, why on earth would I take all this money out and pay tax that's insane. Well, let's let's make sure we we hit on that. Right? So a lump sum distribution, you already you and we noted this before, but that does mean everything out. Right? Not just out into an IRA. Like, out of retirement people. That's right. Yeah. Why on earth would I do it? Well, maybe there was a smaller balance and you needed the money. That that could be possibly your low bracket. Mhmm. But I wanna combine this. Like I said before, with stock values being high at time we're talking about this. You always have to say this way because you don't know when somebody's they'll fight. Ed, Jeff, what are you guys talking about? The whole market credits. Or maybe it even went up further. Well, I'm an optimist. I always believe eventually the market will go up. But let's say you are an employee, a longtime employee of company. And in your 401k, you had a stock of that company. Company stock. There's a little-known break, although I think it's getting more into the system, but for most people, they don't realize there's a big tax break for something called net unrealized appreciation in employer securities or what we call for short in NUA stock. And the big benefit is if you do a qualifying lump sum distribution, that NUA, and let me explain what that is. I'm going to give an extreme example. Not everybody has this, but in the tech industry, it could be possible. Over the years, your stock and whatever the company is, you you the cost was, say, a hundred thousand dollars. And now it's worth a million after all these years. So you you took a hundred thousand dollars of your 401k money and bought stock of the company. X y z. Yeah. Company. Right. Now it's worth a million, but now you're laid off or you're leaving the company for whatever reason separating from service. Did you know that if you did a qualifying lump sum distribution. That difference between and again, I'm showing you an extreme example to demonstrate the tax point. That difference between a million and the hundred thousand cost is nine hundred thousand. That's NUA. In a qualifying lump sum distribution, you would only pay tax. You would remove all of that stock to a taxable brokerage account. So the million dollars of stock. Yeah. The million dollars. All of that comes out, but you only pay tax, ordinary income tax on the hundred thousand. The other nine hundred thousand is not taxed at all until you sell it. And when you do, even if it's a day later, you get to pay capital gains rates, the favorable long term capital gain rates. On the other hand, if you rolled that all over to an IRA because you didn't know about this. Number one, it's irrevocable. You can't go back and say, oh, I wish I saw this podcast before. Now it's in an IRA, you're gonna pay all ordinary income tax. That's a big break. Not available to everyone. You have to have first of all, it only works if the stock is highly appreciated. Because if I reverse the example, Jeff, let's say the cost was nine hundred thousand, and the stock is worth a million. Well, that's not worth it. Who wants to pay tax on nine hundred thousand. That's right. Maybe only you do a small amount to fund your first year retirement or something like that. But, yes, I I agree. It would, a massive full scale NUA transaction would not make any sense whatsoever. In, well, at least for most people. Unless you were gonna spend all million dollars right away. Right. Right. But, you know, the in thinking about this a little bit further, you know, it just goes to show that there's no one way for everyone. Right? The, like, not everyone has company stock inside their 401k. And if they do, not everybody has appreciated stock, but everybody is probably gonna have choices in front of them. And ten percent penalty exception may be more valuable to someone than than another individual. Right? If you're if you're sixty years old when you leave work, You don't really care about ten percent for the exceptions. But if you're fifty six and you leave work, you care a lot about them. And one of the big exceptions is if you leave work at fifty six, You could take money out of your four zero one k without a penalty. If you move it over to your IRA, you can't. That would be a reason to leave the money in the plan or go to a new company's plan. If you wanna ticket out of there. And the age fifty exception for our public safety employees is there. And even on the NUA break that I talked about, you could, in my example, with the hundred thousand taxable, you could pay a ten percent penalty on that hundred thousand if you're under the fifty five. But in that case, it might be worth it. To get the other nine hundred thousand dollars Right. Without a penny. Yeah. Absolutely. I mean, there there are so many different things that you could do, and and so many different variables. Again, we talked about them creditor protection fees, ten percent penalty exceptions, investment options. Also, just platform. Right? Some you may have your accounts at a place, and you may wanna simplify your life. You can also simplify your RMDs. That's that's another point. Yeah. If you have, you know, the average baby boomer, I don't know if it's still true today. The last time I looked at, the labor statistics is to the average baby boomer held twelve point three jobs inside their their lifetime which look, I don't think everyone had a four zero one k, but let's say they had two or three or four different 401ks. Well, when you get to retirement age, an RMD age, that means you have to take two or three for different RMDs from each one of those plans, whereas if you kind of consolidated them in one IRA, which is kind of a nice nesting place for them, You only have to deal with one set of IRA or one RMD. Even if you roll them over to different IRAs, you still only have one RMD that you have to worry about. One IRA RMD can kind of I think of it like the lord of the rings rule. Right? It's like one RMD to rule them all. It's okay. So No. That's one of the big reasons. People First of all, once people reach RMD age, seventy three now, they want simplicity. They don't wanna be messing around with all these different RMD calculations, make a mistake. So there's something for that. Plus control. They control their investments. They control their withdrawals. You know, sometimes there are benefits as you said to leave money in a company plan, but and you're under the company plan rules. Yep. And I say no matter where you put your money, you wanna make sure that your heirs know where it is. You know, Ed, in the most recent law, one of the things that I I find most funny is part of the law actually creates. It sounds like a ridiculous thing that you'd have at school. The retirement savings lost and found. Right? It's like Oh, wherever? You went to school, and you forgot your hat somewhere. It went to the lost and found. Now we have a retirement savings lost and found in case you don't know where your 401k money went. No. People forget about these things. No. It's a real thing. Didn't they have something earlier though under the pension benefit guarantee corp some version of the Yeah. This this is, like, a new version of it where the government has to sink a lot more money in and, and help people track down what's missing. But, you know, the fact that we even need to have a department of retirements, they sorta, you know, shows you how many people are are not keeping track of these dollars. And if you have three or four or five or six different 401ks, it's a lot harder to keep track of them than one place where you've consolidated your assets. Yeah. No. That that makes, perfect sense. And that's one of the winners for the IRA rollover. Consolidation and control. And also for estate planning, you could split up assets, name different beneficiaries. Sometimes the people at the 401k gotta go through a lot of red tape. You can't always get the plan you want for your estate plan. You're more likely to get a better plan in an IRA. But the bottom line with all of this, is that if you have a lump sum available to you, separation from service, we started talking about all the layoffs which triggered a lot of this. But there's some people that just they're they're retiring. Or, they just wanted to move money. They have like you said, the money all over the place. But if they're retiring and they have this big 401k, maybe you wanna have more control over that, but you want to explore every option to see which option is best for you? So ultimately, Ed, started off today's episode asking the question, should you roll money from a 401k over to an IRA? In ten or fifteen seconds. What's your answer? In most cases, yes, unless there are factors like the creditor protection, like the NUA, that are clearly a benefit to you in your situation by leaving it, say, in a company plan or a lump-sum distribution. Yep. I'd have to agree. There's a reason more people and the default, if you will, is almost the Ira rollover. It's probably the right move for most people. Most people. But you're not most people. You're you. And your facts and circumstances may be different for someone else. So it's important to know which of these options is best for you. So let us know. What what do you think? Is the IRA rollover the right move for you? You can reach out to us on Twitter Ed @TheSlottReport myself @CPAPlanner. We'd love to hear from you, and thanks so much for joining us for this episode of the great retirement debate.