When Rolling Over Isn’t Such a Neat Trick

We have a new intern, and he and I were talking about some soon-to-be-retiring clients who were going to rollover their 401k retirement plans at work into Individual Retirement Accounts (IRAs). He asked me if we ever advised clients not to rollover their 401k accounts.

 It was a good question. Rollovers are usually a good idea, as most retirement plans don’t have very good investment menus and tend to have high administrative fees. (As a side note, these fees have long been hidden from participants. They will soon be made visible to retirement plan participants for the first time due to recent legislation. Be prepared to be disappointed.)

 That said, there are two very important exceptions for employees of the UniversityofNorth Carolina when considering retirement plan rollovers:

 1. Vested participants in the Optional Retirement Plan (ORP)

 Currently, the State pays the entire premium for individual retiree coverage in the PPO Basic (70/30) Plan for vested participants who receive a monthly benefit from their ORP account. (Retirees who elect the PPO Standard 80/20 Plan still have to pay a small monthly premium.)

 Vesting is determined by how many years you’ve contributed to the ORP system, as well as when you were hired. Individuals hired before October 1, 2006 require 5 years of contributory service prior to becoming vested. Individuals hired on or after October 1, 2006 require 20 years of retirement service credit in order to have the State pick up the entire tab for the PPO Basic (70/30) Plan.

Why is this important? Because a rollover of ORP assets into an IRA results in a forfeiture of eligibility for the State’s retiree group health plan coverage! If you rollover your ORP, the State is off the hook for paying your premium. Given the accelerating price of health care, a rollover of vested ORP assets brings with it a tremendous cost.  

2. Participants in the North Carolina 401(k) or 457 Deferred Compensation Plan who made contributions prior to August 12, 1989

 Any benefits received from these plans for individuals who contributed prior to August 12, 1989 are covered by the Bailey Settlement, so named because of the NC Supreme Court decision in Bailey v. State ofNorth Carolina.

 That’s important, because distributions from Bailey-eligible accounts are free from North Carolina state income tax! The Bailey exclusion also applies to distributions from ORP accounts or TSERS (the state’s defined benefit plan), provided the retiree had five years of creditable service by 8/12/1989.  

 Any rollover of Bailey-eligible accounts into an IRA invalidates the tax-exempt status, thus subjecting future distributions to state income tax. The Bailey settlement does not include 403(b) accounts.

 These two exceptions to the typical rollover advice are prime examples as to why it’s important to work with advisors who are well-versed in more than just investments. At Woodward Financial Advisors, our knowledge of the UNC and Duke benefit plans make us an excellent fit for professors and administrators looking for wealth management options in the Chapel Hill andDurham areas.

About Ben Birken

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