As a growing numbers of workers leave the office to head home into retirement, they're taking with them an incredible amount of assets into the IRA market. In 2007, IRA assets grew 12.5 percent, the fifth straight year of double-digit growth, according to a September Employee Benefit Research Institute study.
The study also revealed that new IRA contributions didn't power the growth so much as rollovers from other retirement plans, such as defined contributions plans. In fact, total IRA assets in 2007 were $4.75 trillion, compared with $3.49 trillion for defined contribution plans and $2.33 trillion for defined benefit plans, EBRI said.
Are you asking the right questions to ensure your suggested approach to their rollover is aligned with their thinking? Here are four questions to consider.
- Have you considered a Roth IRA? Roth IRAs continue to attract significant new deposits, and are outpacing the growth rates of traditional IRAs. True, there's a huge hurdle right now in converting from a traditional IRA to a Roth: the client's adjusted gross income has to be below $100,000. But that AGI limit will go away in 2010, so the client's time window for the rollover remains an important consideration. Roths must be funded with after-tax dollars. But, the advantage of a Roth is that it will provide your client with tax-free retirement income unrestricted by the mandatory withdrawal rules of traditional IRAs, thanks to the tax-free growth feature of a Roth IRA.
- Are you holding on to several small retirement accounts? Baby boomers have experienced more career mobility than their parents, leading many to have old qualified plan assets still sitting with a number of former employers. For many, this set of disconnected accounts may represent an age-old strategy: Don't put all your eggs in one basket. But, in reality, these accounts pose two distinct disadvantages. The first is that the smaller pools of assets are not weighed in the context of your client's total portfolio; neither you nor the client know just how much risk these assets might pose to an otherwise balanced portfolio. The second potential disadvantage is the cost: the client may be paying multiple fees and charges related to these accounts.
- Is there company stock in your retirement accounts? In many cases, a client easily could overlook a sizeable tax benefit by rolling over all qualified plan assets directly into an IRA without considering the value of company stock. Net unrealized appreciation of company stock is the difference between the current value of the client's stock within the qualified plan, and the total amount the client and the company originally paid for that stock. In many cases, the NUA will be many times higher than the original cost. As a result, the client might be eager to roll over the NUA over with the rest of the account in order to avoid current taxes. But, when the client finally withdraws this money, he or she will pay ordinary income tax rates as high at 35 percent, even though the NUA normally would be subject only to capital gains tax, currently 15 percent. To avoid this scenario, you might counsel your client to look into transferring only non-stock portion of the qualified account into the IRA and then take an in-kind distribution of the company stock.
- When do you think you'll need to access your money, and are you concerned about managing your retirement income? One-off rollovers provide an opportunity to revisit a potential retirement date and the client's thinking on retirement phase withdrawal. The client's answers might be a surprise. Despite the recent trend that has people pushing back their retirement dates, we have to remember that these trends represent averages, and clients are individuals.
By raising these four questions in your rollover conversation with clients, you'll be positioned to help them clarify their goals, secure appropriate products, mitigate tax losses and ease their minds about the uncertainty of their retirement years.
Kathleen Murphy is CEO of ING U.S. Wealth Management. She leads a range of businesses including ING's defined contribution segments, the rollover/payout business, both the fixed and variable annuities businesses and the ING Advisors Network business unit.
