By Joe Cicchinelli, IRA Technical Expert
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When you are entitled to receive withdrawals from your employer's retirement plan, such as a 401(k), a rollover to an IRA is a smart move in most cases. But there are some times when it’s best to leave the money in the employer plan and NOT do a rollover to an IRA.
One of the main reasons to leave your retirement funds in your employer’s plan is if you are worried about lawsuits. (Note: The employer’s plan must have employees, not be a single participant plan.) For example, maybe you are a physician who is concerned about malpractice liability. Or perhaps you’re a business owner such as a contractor who is worried that you may be sued at some point and you want to protect your employer retirement funds from creditors. The good news is that those assets in your employer’s retirement plan are protected from creditors by federal law.
Leaving your funds in your employer plan will give you the most protection from creditors including bankruptcy. But, if you roll over those funds to an IRA, a problem might arise. IRAs are not protected by federal law, except in bankruptcy (up to $1 million). Whether IRAs are protected from your creditors is based on state law.
Some states protect IRAs but that protection varies from state to state. Also, the protection, if any, could be different for Roth IRAs than that afforded to Traditional IRAs. It might pay you to find out from an attorney what, if any protection, your state has for IRAs before you do an IRA rollover from your employer’s plan.
Aside from protecting your employer plan funds from creditors, there are some distinct disadvantages to leaving your money inside the plan. The investment choices inside your employer plan are limited whereas you have virtually an unlimited choice of IRA investments. Also, it is easier to work with a financial adviser and get personalized advice when retirement funds are in your IRA versus your employer plan.