By Andy Ives, CFP®, AIF®
IRA Analyst

When the chips are down, the providers hold all the cards. This is true for both IRAs and workplace plans. Ultimately, the IRA custodian (through its custodial form) and retirement plan sponsor (through the plan document) will dictate what a person can and cannot do with his retirement dollars. Prior to sauntering into a local saloon and sitting down at the poker table, be sure to know the rules of the game before asking to be dealt in.

For example, if a deceased IRA owner named both his son and daughter as beneficiaries, the custodian can refuse to allow the children to stretch the inherited IRA RMD payments over their own life expectancies. Additionally, what if the beneficiary son wants to disclaim his portion of the IRA? A custodian does not have to accept disclaimers, either. While the tax code allows for both stretch payments and disclaimers, “house rules” could dictate otherwise. Be sure to verify what is and what is not allowed by reading the IRA custodial form.

The custodial form will cover other factors that might be important to you. What are the default provisions when no beneficiary is named? Will a trust be accepted as a beneficiary? Will your power of attorney be recognized? Is a customized beneficiary form allowed? If it is discovered that your IRA custodian does not permit certain investments, or if the custodian refuses to allow otherwise eligible beneficiaries to stretch payments over their own lifetimes, there is nothing precluding an IRA owner from changing providers. Identify a custodian that meets your needs and request a direct transfer.

Workplace plans like 401(k)s can have similar issues. As an employee and participant in a 401(k), just because you want to defer part of your salary into a Roth doesn’t mean the plan is required to offer a designated Roth account. Not all plans do. In fact, not all plans allow loans, and not all plans allow after-tax contributions. In the Wild West, the law of the plan is the law of the land. Unfortunately, a participant in a 401(k) does not have the flexibility to change providers as easily as an IRA owner does.

But all is not lost. Circle the wagons! 401(k) plans can be amended. Safe harbors can be added. Loan restrictions can be removed. A good advisor and/or third-party administrator (TPA) can make recommendations to plan sponsors on how to modernize an existing plan to meet the needs of both the plan sponsor and participants.

The design elements within a 401(k) are endless, from eligibility to vesting, from profit sharing to matching. With all the complexities, it’s easy to see why plan sponsors themselves often fail to understand what their own plans allow. As with IRAs, be sure to know what is and what is not permitted within your workplace plan, and keep your sidearm holstered. Fighting a plan sponsor or IRA custodian is more often than not a losing battle.

IRA custodial forms and workplace plan documents may not be page turners, but knowing what information they contain will keep you out of a shootout at the IRA & 401(k) Corral.