Augusta, Ga. (WJBF) — When it comes to financial planning, one of the biggest debates can be what the best plan is to use. New regulations could play into making that decision. That is why Jeff Fehrman, President of the Fehrman Investment Group, took the time to explain the possible advantages and disadvantages of a 401k and an IRA.
Jeff Fehrman: Today, I wanted to focus on retirement plan accounts, in particular because as of this last Monday, June 9th, there are a lot of new regulations from the Department of Labor regarding IRAs and qualified plans. So, I thought we’d cover what are kinda the advantages, disadvantages, education on qualified plans and IRAs. So, let’s start with 401k, really overriding typical qualified plans. What are some of the advantage of those?
Obviously, one typically is that cost is a little bit less than other investment vehicles potentially, just because of the number of participants. Also, within those plans, a lot of ’em have a loan provision so you have some access to your principal if you need it in an emergency. Also, if you retire early, qualified plans may have a age 55 withdrawal privilege that gets you around the 10% withdrawal provision in the IRS. On the other end of the spectrum, if you’re still working, you may be able to push back your required minimum distribution if you’re over age 70 and still participating in the plan. And lastly, you also have creditor protection in the typical qualified plans. So, those are some of the positives. Obviously, it’s a little plan-specific, but those are good overreaching ones.
What are some of the disadvantages? A typical qualified plan will have choice limitations. Some plans do have self-directed brokerage, but that’s a little more of an anomaly. Usually, you’re gonna have 10 or 15 options and that’s the only ones you can pick from. The loan provision, what’s a positive can also be a negative because if you do terminate, that loan becomes distributable and becomes a taxable event potentially, unless you can pay it back. Also, you would be subject to there’s IRS rules around distributions, but a plan itself can have more rules around distributions that might make it even more difficult to distribute for various reasons. Also, typically, if they’re doing some managed portfolios or allocations, they’re gonna be kinda plan-specific and there’s not gonna be a lotta custom tailoring to you as the individual participant. So, those are a few qualified plan rules.
Also, let’s talk a little bit about IRA advantages and disadvantages. One of the big advantages is the number of options. So, a lot of our clients like the fact that outside of a qualified plan and an IRA, we have literally thousands of different investment options that we can custom tailor. Also a lot of times, we have a little more flexibility in beneficiary designations and distributions, stretch IRAs and distributions to potential beneficiaries. Also, you might have a more customized required minimum distribution that’s gonna be personalized to you. So, if we have multiple accounts for a participant, we can pick and choose actually which accounts we take monies out of and be tax-efficient or certainly efficient from a distribution specific to the underlying investments. In one of the biggest ones, obviously, we’re in the service business and education business, so at the individual level and individual retirement account, you’re gonna have personalized service from the investment standpoint even more in-depth related to estate planning and long-term care planning and health care planning and Social Security planning, as well as the retirement income plan. Where do we take money first? Is it my Roth? Is it my regular account? Is it my IRA? Is it the 401k? So, lots of different things to think about.
What are the potential disadvantages on the IRA side? One would certainly be, typically when you have a more robust service, your cost can be slightly higher. Again, that really depends on the participant and values, but that’s something your advisor can talk to you about. There’s not a loan provision in IRAs, and that’s not a Fehrman Investment Group, that’s just an IRS rule. Also, the age 55 early distribution rules do not apply in an IRA. You can do something called a 72distribution, which is a little different way to get around the 10% penalty as well. So, the bottom line really, the big difference from the qualified plan to individual IRA is really a service issue. Do you want more service? Do you need more intricate planning? Do you want that personalized attention and education? That’s where an investment advisor can come in on the individual side and really provide some value for you.
So, hope this was helpful. If you do have more questions about the Department of Labor rules and how that affects you, should’ve gotten notices from your investment advisor, we’d be happy to give you a second opinion or at least educate you on what’s really going on and what are those regulations and how they would affect you. Have a great weekend.