Introduction
In this article we will address legal, tax, and planning considerations, including ERISA protections, IRS rules, rollover strategies, and estate planning implications. Understanding these elements is essential for advising clients on retirement and legacy planning.
Legal and Tax Framework
401(k) plans are governed by the Internal Revenue Code (IRC) and the Employee Retirement Income Security Act (ERISA). Under IRC 401(k), contributions to traditional accounts are made pre-tax, reducing taxable income and allowing tax-deferred growth. Roth 401(k) contributions, under IRC ?402A, permit after-tax contributions with tax-free withdrawals if conditions are met. For 2025, the contribution limit is $23,000, with a $7,500 catch-up for individuals aged 50 or older (IRC ?415(c)(1)). These contributions are increasing in 2026 to $24,500 to a 401(k), with an $8,000 catch-up allowance. Required Minimum Distributions (RMDs) generally begin at age 73, unless the participant is still employed and not a 5% owner (IRC ?401(a)(9)).
ERISA Rules and Employer Protection
ERISA imposes fiduciary duties on plan sponsors under ERISA ?404(a) and ?1104(a)(1), requiring prudent management of plan assets. These rules protect employers from liability for market losses when fiduciary standards are met. However, ERISA limits participant autonomy by restricting investment choices to the plan’s menu and allowing blackout periods during recordkeeper changes (ERISA ?101(i)). Failure to provide proper blackout notice can result in penalties under ERISA ?502(c). ERISA also provides strong creditor protection for plan assets under ERISA ?541, which IRAs do not fully replicate outside federal bankruptcy exemptions (Bankruptcy Code ?522(n)).
Why Keep Assets in a 401(k) After Employment Ends
Retaining assets in an ERISA-qualified plan can offer significant advantages, including creditor protection and potential access to institutional pricing. Participants who continue working beyond age 73 and are not 5% owners can defer RMDs from their current employer’s plan. Strategies such as Net Unrealized Appreciation (NUA) for employer stock can offer favorable tax treatment, converting appreciation into long-term capital gains rather than ordinary income.
Reasons to Roll Over to an IRA
Rolling assets into an IRA can provide greater flexibility and control. IRA owners can select from a broad range of investments, implement tax-efficient withdrawal strategies, and integrate accounts into a comprehensive financial plan. Estate planning benefits include multiple beneficiary designations and Roth conversions for tax diversification. IRAs also allow Qualified Charitable Distributions (QCDs) starting at age 70.5 under IRC ?408(d)(8).
The IRS requires that non-periodic taxable IRA distributions are subject to a default 10% federal withholding, unless you explicitly elect otherwise. You may choose a different percentage or even waive withholding, but if you don’t specify, the 10% rate applies.
For taxable distributions from qualified employer plans—such as 401(k), 403(b), or similar—it’s mandatory to withhold 20% federal tax on any “eligible rollover distribution” that is paid directly to the participant rather than rolled over. Working with Professionals & Action Steps Professionals should review client goals, risk tolerance, and estate planning objectives before recommending a rollover. Compare plan fees versus IRA costs and justify any additional expenses with enhanced services. Model tax implications of Roth conversions and QCD strategies. Ensure compliance with rollover rules: direct rollovers under IRC ?401(a)(31) avoid withholding, while indirect rollovers require completion within 60 days and are subject to the one-rollover-per-year rule (IRC ?408(d)(3)(B)).
Impact of the SECURE Act
The SECURE Act of 2019 significantly altered distribution rules for inherited retirement accounts. Most non-spouse beneficiaries must fully distribute inherited IRAs within 10 years of the account owner’s death. Eligible designated beneficiaries, such as spouses or disabled individuals, may stretch distributions over their life expectancy. Attorneys drafting trusts as IRA beneficiaries must ensure compliance with these provisions to avoid accelerated taxation.
Integrated Financial and Estate Planning
Coordinating retirement account decisions with estate planning strategies is critical. Advisors should work with attorneys and CPAs to align beneficiary designations, trust structures, and tax strategies. Consider Roth conversions for tax diversification, QCDs for charitable goals, and NUA strategies for employer stock. A multidisciplinary approach ensures optimal outcomes for retirement and legacy planning.
References
· Internal Revenue Code ? 401(k), 402A, 408(d)(8), 415(c)(1)
· ERISA ??404(a), 101(i), 502(c), 541; 29 CFR 2520.101-3
· SECURE Act of 2019, Pub. L. 116-94
· IRS Announcement 2014-15 (IRA rollover rule)·
Read more articles by Martin's Financial Consulting Group