Washington, D.C. (March 17, 2004) -- Changing jobs can be quite a hassle for most new employees; deciding what they should do with their existing 401(k) plan can be even more time-consuming, not to mention confusing.
In Revenue Ruling 2004-12, the Internal Revenue Service just made it a bit easier for employees to take some time to consider what they want to do with assets accumulated at their previous employer. The IRS now says that employees will not be penalized if the assets originally placed in a new employer’s 401(k) plan are subsequently taken out.
The ruling updates IRS code due to changes from the Economic Growth and Tax Relief Reconciliation Act of 2001. According to the ruling, if the qualified plan "separately accounts for amounts attributable to rollover contributions to the plan, distributions of those amounts are not subject to the restrictions on permissible timing that apply… Accordingly, the plan may permit the distribution of amounts attributable to rollover contributions at any time pursuant to an individual’s request."
Despite a potentially appealing selection of mutual funds in the new 401(k) plans, typical reasons that employees may want to move their old 401(k) plan money could be unhappiness with investment selection or performance, or a desire to use the money for other reasons, such as estate planning. Before the tax law change of 2001, it was much more flexible to move money out of an IRA than a 401(k) plan.
"It’s a classification, rather than a rule change, in ways to handle retirement plan rollovers. The whole premise of the IRS is to try to keep the portability of [defined contribution] retirement plans when one changes jobs," said Daniel Lamaute, CEO and retirement plan specialist with Lamaute Capital in Alexandria, Va. "This just extends it a little bit more. If someone were to join a company and roll over their retirement plan into the new company’s retirement plan, as long as the new plan accounts for it separately then that person can continue to move that money."
Yet tax-centered advisers say the ruling is more just a technical change than truly groundbreaking.
"In trying to make things easier, these are really technical and obscure rulings," said Claudia Fitch of Fitch Financial Advisors LLC in San Francisco.
In making sure that companies continue to have "qualified" plans, she said, "[they] are dealing with complex requirements of trying to initiate these changes. As they run into roadblocks, they go to the IRS for a ruling. It’s probably not something that the average adviser’s going to pay attention to. [It’s] more for the employer side."
Another ruling, IRS Notice 2004-15, creates a similar 72(t) distribution for non-qualified annuities. Now early retirees (those younger than 59-and-a-half) have the ability to make a penalty-free one-time adjustment to their distribution amount from non-qualified annuity contracts, due to poor market conditions. Though qualified annuities do have this regulation, those in non-qualified annuities would normally be subject to a 10 percent penalty if this change were made. (However, contract holders do have the ability to take early distributions if certain qualifications are met.)
"In the qualified plan market … the people who had taken the 72(t) distribution wanted more money than that," said Ben Baldwin, of AXA Advisors/Baldwin Financial Systems in Northbrook, Ill. He added that the notice is a no-cost, yet positive PR item for the IRS.
"People may have selected a payout stream that no longer fits their retirement plan," said Laurie Lewis, vice president and chief counsel of federal taxes at the American Council of Life Insurers. "The IRS is going to give you an opportunity to recalculate the amount you take out every year."
Again, this ruling applies to only a limited amount of people, but "if you’re in that pool it’s pretty important that you have this flexibility," Lewis said.
-- Laurie Kulikowski, Financial-planning.com
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