For clients that plan to work into their 70s, qualified plans can offer the ability to delay required minimum distributions (RMD) from the plan for active employees. Plans do not have to offer this feature so check the summary plan description (SPD).
Also look for the ability to roll IRA money into the qualified plan. Most plans seem to allow this. It is a handy way to press “pause” on RMDs for persons over 70 ½. The “roll-in” is a non-taxable transfer so it has appeal versus another common way of avoiding RMD, the Roth conversion. However, a roll-in sometimes isn’t so helpful when clients want to donate their RMD to charity through a qualified charitable distribution. Those are permitted only from IRAs.
Younger folks can sometimes benefit from a roll-in to a qualified plan. One circumstance we see that makes a roll-in attractive is the case in which the client has made non-deductible contributions to a traditional IRA and wants to make a Roth conversion.
They can roll all but the non-deductible contributions from all their IRAs into their qualified plan. It is not permitted to rollover non-deductible IRA contributions into a qualified plan. The traditional IRA, being comprised solely of already taxed non-deductible contributions can then be converted to a Roth at no taxation.
For many freelancers and consultants, there are no employees so the roll-in for Roth conversion strategy can be arranged through an Individual 401(k) for the freelance business. The Individual 401(k) won’t help them delay RMD at age 70, however.
Back to traditional employees, one aspect to consider is net unrealized appreciation (NUA). We analyze the advisability of utilizing NUA when clients own company stock within their plan. In return for paying taxes at ordinary rates on the basis of such stock, the remaining unrealized appreciation can be realized through a sale and taxed at long-term capital gain rates.
In scenarios where the difference between the long-term capital gain rate upon sale and the ordinary rates that would apply upon a distribution is large, NUA treatment can be a significant tax savings. Rolling the stock to an IRA eliminates the NUA option.
Another thing that can be lost or limited by rolling to an IRA is creditor protection. Generally, ERISA plans enjoy unlimited creditor protection but IRAs are subject to state laws and can have some vulnerability.
Thinking even longer term, we must remember that as John Maynard Keynes once wrote “In the long run, we are all dead.” There are a number of quirks that apply to beneficiaries of qualified plans and IRAs
Qualified plans can allow but are not required to allow for stretch capabilities. Many plans do not wish to administer these payments for decades and so possess the ability to require a full payout of plan assets within five years of the employee’s death.