How to Rollover Your 401k (or 403b or 457b) to an IRA

Broadcast Retirement Network's Jeffrey Snyder discusses the factors individuals need to consider before rolling over their retirement accounts (401k, 403b, 457b) to an IRA with Convergent Retirement Plan Solutions' Ben Norquist.Jeffrey Snyder, Broadcast Retirement NetworkJoining me now, Ben Norquist is the CEO and founder of Convergent Retirement Plan Solutions. Ben, great to see you. Thanks for joining us this morning.Great to see you, Jeff. Thanks for having me. You know, Ben, rolling over your retirement plan to an IRA, that happens virtually every day in our industry.It's an important decision to make. And I wanted to come to you because I wanted to ask about the importance of making that decision and what goes into it. So let's start with a basic question.What's the first thing you need to know when you're thinking about taking money out of your 401k, so you've left the company, retired, term, whatever, and rolling it over?Ben Norquist, Convergent Retirement Plan SolutionsWell, I think one of the first factors to consider is because you always have the opportunity to leave the assets in the employer plan. And so I think when you're considering a rollover, one of the first things you should ask yourself is what is the objective? Why do I want to roll over?And then you can start looking into those reasons to see if they hold up under scrutiny.Jeffrey Snyder, Broadcast Retirement NetworkYeah, and a lot of people work with a financial advisor and there's nothing wrong with that. We encourage that actually within our industry, but the first inclination probably of a retirement plan advisor is, hey, let me get this money under my purview in an IRA. But one of the things that always sticks out to me about this, Ben, I want to get your thoughts about this, is the cost.As you said, leaving the money in the plan, typically a retirement plan expenses, most cases, not all, will be lower. The investments will be lower because they're institutional share classes.Ben Norquist, Convergent Retirement Plan SolutionsThat's correct. That's exactly correct. And cost is a key metric that is in front of mind for everyone, but you should be looking at it.And oftentimes it is much more cost effective to leave your savings in that retirement plan. That doesn't mean that should always be the case, but if you're not looking at the expense ratios and the cost of holding that portfolio within the 401k plan versus in a retail account, you're missing one of the very large variables. And keep in mind, depending on what type of advisor or counselor you're working with, hopefully they've got your best interest in mind and they're making this suggestion, but depending on how they're compensated, sometimes there can be some potential conflict of interest there in terms of how they get paid versus what makes the most sense for you as the investor.Jeffrey Snyder, Broadcast Retirement NetworkYeah, well, certainly hiring that advisor, knowing whether or not they're a fiduciary, which I think you're kind of hinting towards, knowing if they're a fiduciary, what their responsibilities are to you versus to their organization or to somebody else is very important. Let's talk about the process of actually rolling over. So if you decide to move money out of your plan, is it easy to do?I mean, I remember being a record keeper, you were a record keeper. There was a lot of paperwork back in the day. You had to get a letter of determination, all these kinds of things, but is the process easier than it was maybe even 10 years ago?Ben Norquist, Convergent Retirement Plan SolutionsIt's a good question, and you would think and hope that it would be, and in some environments, in ecosystems it is, but it still can be remarkably painful in some environments. Ironically, moving money between IRAs is much more streamlined and universal than moving money from employer plans into IRAs. In fact, in one of the recent law changes, Congress actually mandated the IRS to come out with some uniform protocols to help streamline and facilitate the exchange of information that has to occur when you're leaving an employer plan and putting it into a retail account.So it's far from perfect at this stage.Jeffrey Snyder, Broadcast Retirement NetworkYeah, it sounds like there's still work to be done, maybe legislatively, regulatorily, if that's a word, and also where I kind of have lived, and I know you have, practically, to get it done. I mean, it really should be a smooth process if you think about it. It should be pretty smooth, yeah.Ben Norquist, Convergent Retirement Plan SolutionsYeah, and I think we really would benefit from more uniform standards regarding that communication between the IRA provider and the plan provider. There's pretty much uniform protocols in place. If you're doing an IRA transfer, there's typically a handshake between the financial institutions and clearer expectations about what the sending and receiving organization should send and should receive.Not necessarily the case in the employer plans market. You still have, I work with clients all the time, and they're offering retail products. They say, we'll get a check, shows up at our office with no instructions, no details.Does it go on a traditional Roth? Does it go on a Roth IRA? It's supposed to be split.There still is a lot of improvement and room for improvement, the rollover process, the operational process, and specifically that communication link between the retail provider and the employer plan.Jeffrey Snyder, Broadcast Retirement NetworkYeah, and let's be clear. I mean, ours is an iterative system. It has grown this way for over 40 years.It constantly is being refined. There's a lot of good people working to do that. You brought up the Roth conversation, or you didn't bring up the conversation.I'm gonna bring it up in conversation. Let's talk about Roth versus traditional. This is an important decision that oftentimes within a qualified plan, like a retirement plan, you're making the decision of Roth or traditional 401k or 403b or 407.Let's talk about what do I need to know about when I'm rolling that money out into an IRA, for example.Ben Norquist, Convergent Retirement Plan SolutionsReally good question. First and foremost, if you've got Roth savings in your 401k plan, you wanna make sure that if you decide to do a rollover, that your Roth is going to a Roth IRA and your pre-tax is going to a traditional IRA, unless you choose to do a conversion, you don't pay the taxes, but just so the simple bifurcation. A couple of other things, the factors to keep in mind is it used to be that Roth 401k plans were subject to RMD requirements, but Roth IRAs were not.So that was some, sometimes people leave it or get into the Roth IRA to avoid the RMDs. Recent law changes have made them parallel. So you can leave the Roth money in the 401k plan without taking RMDs.The other factor is just basis recovery. And basis means the money I've paid taxes on, how does that come out of these various Roth schemes? And there is a fundamental difference there that people should be aware of.When your Roth money, when you take it out of a 401k plan, if I take direct distributions, like during retirement, my basis comes out pro rata with my earnings. Now that's not an issue if I'm getting qualified tax-free withdrawals, but if I'm taking non-qualified distributions that has a significant income on my tax and penalties. Once that money goes into a Roth IRA, it's basis first.And that means you can always go in and take that basis out without tax or penalty. So that's a factor to keep in mind when you're looking at where you can best access that money from an employer plan versus an IRA.Jeffrey Snyder, Broadcast Retirement NetworkAnd that basis information, when you're rolling it out, do you get some type of form? Does it show up on your 1099-R, which is the tax form that gets reported on the distribution? How do I, because I would imagine, Ben, that you need to hand some of that information to the provider.Ben Norquist, Convergent Retirement Plan SolutionsYeah, it's a crucial factor. First of all, the plan administrator does have a burden of responsibility on the 1099-R reporting where they should be making an initial determination whether that rollover distribution is qualified or non-qualified, meaning like 59 1⁄2 and five years or not. Have I met that standard?If I qualify for, if I'm eligible for qualified distributions at the time of rollover, then all of that money can go into my Roth IRA as basis. Meaning from that point forward, I can come in at any time and take it out tax and penalty free. If on the other hand, I'm not eligible for qualified distributions at the time of rollover, then that money has to go in on a stratified or bifurcated basis where you have to track the basis going into the Roth and the earnings.And those earnings are still potentially subject to tax and penalty when taken out of the Roth IRA. And another crucial element is that in the qualified plan, the plan administrator is responsible for tracking basis. When you move into the Roth IRA environment, it's the IRA owner's responsibility to do that, not the IRA provider.So your IRA provider will not be tracking your basis in your Roth IRAs. So that's some additional responsibility you're taking on if you roll with the IRA.Jeffrey Snyder, Broadcast Retirement NetworkSo it sounds like, and as we close out our talk and we'll bring you back again to talk about some of these important issues, it sounds like before you do anything, so before I take my money out of our qualified plan, because the tendency is, I got this an essay, I can go by boat, I can go on vacation. You need to really think hard about where you're moving it, to whom you're moving it. There's a lot of things to think through before you even act, before you even press that button on your phone or on the web or on the voice response unit.Ben Norquist, Convergent Retirement Plan SolutionsYeah, think it through carefully because in a lot of cases it's not reversible, you can't undo it. And so get your ducks in a row before you pull the trigger into that rollover transaction.Jeffrey Snyder, Broadcast Retirement NetworkYeah, really important. Ben, great to see you. Thanks for sharing some of your wisdom.And look, we look forward to having you back on the program again very soon, sir. Enjoy it, Jeff. Thanks for having me.