Why Delta Pilots May Want to Consider Rolling Their DC Plan Over to an IRA

airline-pilot-salaryIf you are a pilot at Delta airlines you have a unique opportunity to take control of a portion of your retirement assets. By June 13th Delta Pilots must choose between four different options regarding their Delta Pilots Defined Contribution Plan.

One option is to roll over your defined contribution plan to your existing Delta Pilots Savings Plan (DPSP). If you are looking for an easy solution, with low costs, and reasonable investment options, leaving your money in the company plan may be the way to go. I imagine this is the option that most pilots will choose.

However, there are several reasons why Delta Pilots may want to consider rolling over their Delta Pilots Defined Contribution Plan to an IRA, aka “Option 2” on your net benefits website.

  • Control. One of the main benefits of an IRA vs. a company 401(k) like the Delta Pilots Savings Plan is control over your retirement assets. In an IRA you have maximum investment options. You may only need a few, but there are a virtually unlimited number of investment options available to IRA owners including mutual funds, bank cd’s, annuities of various types, individual stocks and other securities, etc. You may even own real estate, precious metals and other more exotic investments, if that suits your taste. I am not suggesting that you should own those types of assets; just that you could own them if you wish.
  • In an IRA you also have greater control over how you invest. For example, in an IRA you can use stop or limit orders that may help preserve your principal or generate additional income on your investments. You can also trade as frequently or infrequently as you like. For some people, how you invest is as important as what you invest in. IRAs give you that choice.
  • Control over taxes. Under most circumstances both IRA and 401(k) assets are taxed when they are distributed from the plan. If you are under age 59 ½, distributions will most likely also be subject to a 10% penalty. But what happens when you die? In an IRA, you have the maximum flexibility allowed by the IRS when determining your beneficiaries and secondary beneficiaries. For example, if you are married, you probably want your spouse to be your primary beneficiary and your kids to be secondary beneficiaries if your husband or wife were to die first. But what if you wanted to list a trust or charitable organization or some other “non-spouse” beneficiary? Or what if you wish to include specific legal language in your beneficiary designation such as “per stirpes” which allows your assets to pass directly on to your beneficiary’s children if the beneficiary dies first? Does your company plan allow for that? IRAs do.
  • IRAs may also come with advice. IRAs themselves don’t actually provide advice, but the advisor you have your IRA with may. He or she is in a position to know you personally, to know your risk tolerance, your financial goals, your unique needs, etc. and may be able to advise you on ways to manage your IRA and other assets. 401(k) plans may not offer that level of service.
  • 60-day rollovers are available in an IRA. I usually advise that clients don’t do this. Personally, I think that 60 day rollovers are potential tax disaster waiting to happen, but if you are really in a pinch for short-term cash, you may take a distribution from an IRA, and return it within the 60 day window without tax or penalty. If you ever do this, be sure to carefully follow the IRS rules regarding 60-day rollovers.
  • You can make withdrawals on an IRA at any time, whereas in a 401(k) you must leave assets in the plan until you separate from service. There are exceptions such as disability, etc., but generally you can’t take money out of a 401(k) plan while you are still working at that company. In an IRA you always have access to your money. Certainly, any distributions from an IRA are taxable and maybe subject to a penalty, but the money is there if you need it.
  • Roth IRA Conversions. IRAs can be converted to Roth IRAs. 401(k) assets have more restrictions. For example, an IRA allows for “recharacterization” of the conversion if you change your mind later, but this is not possible in a 401(k) Roth conversion. In fact, if the majority of your retirement money is tied up in the Delta retirement plan and you would like to do a Roth IRA conversion, now may be a good opportunity to do so.
  • Do over. IRAs also give you a do-over option of sorts. If an employee chooses to rollover their company retirement plan to an IRA, then later changes their mind, most company retirement plans will accept rollovers into their plan from IRAs. This isn’t true with 401(k)s. Once the money is in a 401(k) it typically must stay there until the employee has a triggering event such as death, disability, separation of service, or your employer decides to let you out.

These are all good reasons to consider rolling over your company plan to an IRA. However, an IRA rollover isn’t always the best choice. There are three reasons why some employees should leave their 401(k) in place. To find out more, read my previous blog post, “Three Reasons to Leave Your 401(k) at Work“.

For most people, most of the time, the only logical reason NOT to rollover plan assets to an IRA is cost. 401(k) plan assets are perceived to have lower expenses, but this isn’t always the case. An IRA doesn’t necessarily cost more or less than a 401(k). In some cases an IRA could be cheaper. In other cases it won’t be. It all depends on the IRA custodian and the investments you choose.

The decision to rollover an old 401(k) to an IRA is an important one. Consider it carefully. To learn more about rolling over your retirement plan, just Ask Mike.

 

 

Required Disclosures: As each individual’s tax situation is different, take time to consider all the facts and consult with your tax advisor before initiating a rollover. Distributions received before age 59 ½ are subject to an early distribution penalty of 10% additional tax unless an exception applies. If converting a Traditional IRA to a Roth IRA, you will owe ordinary income taxes on any previously deducted Traditional IRA contributions and on all earnings. A conversion may place you in a higher tax bracket than you are in now. Because Roth IRA conversions may not be appropriate for all investors and individual situations vary we suggest that you discuss tax issues with a qualified tax advisor. Qualified distributions from Roth 401(k) accounts are tax and penalty free if the first Roth contribution was made at least five years before, and if you are at least 59 ½, are disabled, or have deceased. For non-qualified distributions from Roth 401(k) accounts, earnings are taxable and may be subject to a 10% early withdrawal penalty. This information is not intended to be a substitute for specific individualized tax, legal, or estate planning advice.