Should you leave your money in the 401k or 403b or profit-sharing plan that you have been most recently contributing to?
Creditor Protection: A Key Consideration
One reason for not transferring your 401k or 403b or profit-sharing plan to an IRA is that Employer-based retirement plans may be protected from creditors by federal law. However, IRAs are governed by state law and not all states provide the same creditor protection.
Protecting Your Assets: Legal and Insurance Perspectives
Are you likely to be sued, do you have creditors? You may want to discuss with your attorney and insurance agent how to protect your assets. The attorney can advise you about your state’s laws and may suggest a trust. The insurance agent can review the merits of an umbrella policy. It is a liability policy that opens an “umbrella” over your car and house insurances so that you have more liability protection, if for instance, someone injured himself or herself on icy steps entering or leaving your house.
Considering Legal Protections in Your State
If you are in arrears with creditors or have reasons to be concerned about being sued, before you transfer your account into an IRA, you will want to know that the IRA in your state will provide the same legal protections as the employed sponsored plan.
Involuntary Cash-Out: A Potential Scenario
However, if your account is less than $5,000, your former employer may force an “involuntary cash-out”. Then an IRA may be the only option unless you cash in the account and pay tax on all of withdrawal. More details govern such cash-outs.
Two voluntary reasons for moving to an IRA are 1) that you cannot contribute to the employer sponsored plan and 2) you are restricted to the investments provided in the plan. If you were to transfer your assets to what is often referred to as a self-directed IRA, you can choose from a wider number of investments, and you might be able to contribute to the IRA. Check the regulations.
Overview: Factors to Consider
Overview: Stay in the employer sponsored plan if your main concern is protection from creditors. Transfer to an IRA if you want a larger selection of investments and if you want to contribute to the IRA if your earned income fits the guidelines for contributions.
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Securities and Advisory Services are offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.
Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual.
Contributions to a Traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
