asset management assocates
Private Portfolio Management



In the past, people worked for a company for 25-35 years before they retired with the company pension. These were defined benefit plans. In a defined benefit plan, the benefit is pre-defined based on the participant's historical salary and years of service. The employer had to put away a certain amount of money into the plan based on the employee's salary.  

Corporations are trying to rid themselves of the burden of financing these plans. They are now passing the responsibility on to the employee. The most popular method of doing this is via the 401k plan. The 401k is a defined contribution plan where the employee defines how much money they will put into their own plan. The company usually matches up to a certain portion. That "matched" portion may not be immediately owned by the empoyee for a certain number of years. At that time, the employee will be vested in the plan. The 401k has become the modern day pension.

People tend to move from one job to another and accumulate 401ks that sit at various companies. These plans could be rolled or directly transferred into the employee's own personal IRA account. It should also be understood that any type of employee sponsored pension plan, such as a keogh, SEP, SIMPLE, 401k, 403b and some deferred compensation plans, can be rolled to an IRA account. In certain instances there could be some tax considerations and you may want to keep one IRA separate but in general it is better to consolidate them all under one brokerage account. 

Advantage of transferring 401k/pension to an IRA
  • The IRA will generally give you more investment flexibility.
  • IRA offers more control and more ability to move money. 
  • Upon your death 401k death benefits to a non-spousal beneficiary will be fully distributed and fully taxable to the beneficiary in a lump sum. IRA beneficiaries could open up an inherited IRA, take minimum distributions (RMD's) and spread the tax over time.
  • By consolidating various 401ks into one IRA, it is much easier to develop a diversified portfolio and manage it.
  • Many people that have 401k accounts have a significant percentage of their holdings in one fund or one company's stock. It is always a good idea to diversifiy the holdings regardless of how good the company is or how well its stock has done.  Too many people in many companies have lost everything by holding too much of one stock. It is extremely difficult to make an emotional decision to sell out of the stock of a company that you worked for. Especially if you are not accustomed to making transations! It is easy to diversify via an IRA and still own a percentage of the company stock that you worked for!
Disadvantage of transferring to an IRA
  • In some cases, the company 401k may have an interest bearing account that pays a higher rate than can be found elsewhere.
Mechanics of transferring a 401k
  • Without constructive receipt: This means that you never receive the money into your hands.  It is paid directly to the IRA custodian.
    1. Establish and IRA account with another firm with a zero balance and obtain an account number. I would recomend a discount brokerage firm.
    2. Contact the the former employer or the administrator that handles the plan of the former employer.
    3. They usually have a form to fill out. Indicate on their form the account number that you want to transfer to. They will send the check to them.
    4. In some instances, they will write the check to the new IRA custodian for your benefit and mail it to you. You would in turn mail it in to the IRA custodian.  
  • With Constructive Receipt: This means you receive the funds in cash. This is more complex and should be avoided if possible.
    1. In this case, you would contact the employer or administrator and have them send you a check for the balance. In doing so they are required to withhold 20% of the gross balance for federal taxes.
    2. At the end of the year, the company will send you and the IRS a 1099 indicating that they sent you a gross distribution with the amount of dollars withheld.
    3. To avoid paying the IRS the tax and/or to obtain a refund of the 20% withheld, you would have to deposit the full amount of the distribution (That is the amount you received plus the amount you withheld) into an ira acccount within 60 days of the distribution. Basically 20% was sent to the IRS and you have to come up with that out of your own pocket to cover the tax.
    4. If you keep the money and spend it you not only owe the tax, but also, if you are under 59 1/2, you owe an additional 10% penalty to the IRS.
Concluding Remarks

IRA accounts are designed for individuals. They are fairly easy to work with when you need to take a distribution or manipulate the investments. 401ks are set up for corporations. They have a lot more red tape to deal with. People that let money sit in an old 401k are not taking control over their investments. They are just hoping for the best. This may not be the best strategy for yourself or your beneficiary.


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