Three years ago, R. Boeding, retired from his 35-year job with an electric company. His employer gave him a choice: take his retirement fund money ($450,000) all at once or let the company pay out fixed amounts over time from his account.
If he chose the latter and died early, his wife would only get half the amount.
"It was a no-brainer," said Boeding, who was 55 when he retired. He wanted the money so he took the lump sum, which he then rolled into an IRA.
He faced the question many retirees and job hoppers face: do I leave my money in the 401(k) or other employer-sponsored plan, cash out, or roll it into an IRA? That's a big decision and making the wrong one can be costly.
You might want to consider rolling your money into an IRA because that will enable you to continue to keep your money sheltered from tax as well as continuously invested. Here's the low-down on when and how you can take the money, and why you might want to.
When To Roll Your 401(k) Into An IRA
You can roll your 401(k) money into an IRA only in certain circumstances. Those are: when you quit or are fired from your job, or retire. You can't roll over your 401(k) funds into an IRA while you are still working for the same employer just because you don't like the investment choices in your plan.
Why Roll Your Money Over: General
Take Control: Regardless of whether you're changing jobs or retiring, rolling your retirement money into an IRA gives you control of it.
"Without a doubt, when you leave a company take your money with you," said Michelle Anderson, vice president of personal investment counselors with First Union Brokerage Services Inc. "If you roll into an IRA, you get the money 100% in your control. ... (It) can let you access any investment you want. You aren't limited," she said.
Say you didn't like the investment choices with your 401(k) plan. With a rollover IRA you may have much more flexibility in your investment options.
Indeed, Boeding took advantage of this investment freedom. At retirement Boeding saw a financial planner, who advised him to invest in equity-based mutual funds. He did so and managed to catch on to the recent bull market run in the stock market.
"The portfolio is doing a good job ... and is growing $650 a month," he said.
Get More Data: You get more information about your investments when they're in an IRA than in a 401(k). Federal law is not nearly as strict with 401(k) plans as it is with IRAs when it comes to requiring distribution of informational materials about the funds.
"The information ... that a 401(k) plan has to give to participants is limited,"compared to an IRA, said Greg Thurin, District Manager and Personal Financial Advisor with American Express Financial Services.
Another reason you might want to move the money is that IRA account administrators, who are competing for your business, tend to be more responsive than 401(k) administrators and plan sponsors. Thurin recalls trying to help a client with a 401(k) set up a personal identification number to use over the toll-free number. "It took 15 minutes to establish a ... number," he said.
Simplify Recordkeeping:
With a rollover IRA, you can consolidate money from various plans into a single account. In turn that can simplify recordkeeping.
In today's fluid job market, folks regularly change jobs. Consequently, they end up with money scattered among several retirement plans. With a rollover IRA it can all be brought together, and that can really reduce the number of mailings you get from fund companies. "You can receive one statement, which would make understanding your investments easier," says Richard Casolari, managing partner of Executive Financial Group, a Chicago-based financial planning and insurance service company.
Why Roll Your Money Over: Retirees
Say it's your last day of work. As you finish your exit interview, the human resources person asks what you want to do with the money in your 401(k) plan.
You reply, "I was thinking about buying a new boat or taking a cruise around the world."
The manager says, "That's not what I mean. Do you want to roll it over into an IRA, or should I write you a check?" (If you have more than $5,000 in the account and you're under 65, you should also be able to leave the money in the plan, but your withdrawal options may be less flexible. You may also be charged an annual account maintenance fee.)
Your answer could mean the difference between a paying a big tax bill or not. If you take a lump-sum distribution, you will have to pay tax on it. If it is a large amount, it will probably push you into a higher tax bracket.
However, if you chose to directly roll the money into an IRA you won't have such a big tax hit. The money will smoothly move from one tax-sheltered account to another. Further, you can arrange to make regular withdrawals from the IRA so that you are taking out smaller amounts of money and paying less tax.
Additionally, if you roll your 401(k) money into an IRA, it can stay invested and continue earning profits, tax-deferred. If you take the money directly, you then have to open an investment account and you will have to pay taxes on all profits you earn from that point forward.
Why Roll Your Money Over: Current Workers
Many workers don't know about their options. They completely cash out of the plan, pay a big tax bill and deplete their retirement savings.
"You will lose half of your money if you cash out," said Gary Hooker, a certified financial planner and CEO of Diversified Planning Concepts, a San Francisco-based financial planning firm. "Why take that big a hit? I've never seen any reason to take your money out unless you are starving."
One caveat, regardless of your situation, some 401(k) plans won't let you take your money out until you reach 59½. Check with your plan sponsor to find out the rules for your specific situation.
Thanks to Blackstocks.com for sharing this information.
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Posted by: Stock | October 13, 2008 at 04:44 PM