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Leaving Your Job? Keep Your Retirement Funds Safe with a 401(k)-IRA Rollover

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.

Spousal IRAs: Empowering the Single-income Family

Are you dependent on your spouse to build up your retirement reserves? Historically, most retirement savings have been accrued by employees participating in employer-sponsored plans.

Yet, spouses who don't earn income can contribute to their own retirement account through the spousal IRA option. But, there are some income limits for the working spouse which may dictate how you are able to contribute.

Most tax-deferred retirement savings vehicles, from defined-benefit plans to defined-contribution plans, require the person who's contributing to have earned income. That would seem to leave stay-at-home wives or husbands in the lurch when it comes to retirement planning.

Not quite. If your spouse has earned income but you don't, a spousal IRA offers you the chance to start building your own retirement nest egg.

A spousal IRA is not really a different kind of IRA; rather, it is a way for nonworking spouses to have a traditional or Roth IRA — without "earned" income of their own.

While the concept of a spousal IRA is gender-neutral, it seems that the large majority of married people who are not covered by retirement plans are women.

"Let's face it, these are almost always for women," says Nancy Frank, a certified financial planner in Manhattan, N.Y. In Frank's experience as a financial planner specializing in women's issues, spousal IRAs are one of the primary ways for stay-at-home women to look out for their own retirement.

Who Can Use Spousal IRAs?

Boost Your IRA Returns by Rebalancing

If you're like most people, you probably haven't bought or sold any of the funds in your IRA since the day you set it up. If you haven't, you're probably cheating yourself out of better returns in your portfolio.

What many investors don't realize is that they need to regularly rebalance their IRA accounts to improve profits and stay within their risk level.

In some ways, IRAs are a little like house plants. Both are generally low maintenance. But, with a bit of nurturing, they can produce healthy results.

For an IRA account to grow and flourish, it needs regular contributions and periodic rebalancing.

Yet, according to anecdotal evidence, most people only give their IRAs the contributions. They don't rebalance. Most commonly, workers make an initial allocation and then ignore the account, save checking to see that the balance is rising. As a result, their accounts don't reach their full potential, financial planners say.

Rebalancing "tends to give you extra return," said Greg Curry, certified financial advisor and president of Pillar Financial Advisors in Louisville, Ky.

"Rebalancing is psychologically difficult to do. You are selling what has been doing best."

— Scott Leonard, certified financial planner, Leonard Capital Management.

Before we go any further, let's make sure you don't confuse reallocation with rebalancing. They are two totally different concepts. Many financial planners disapprove of frequent reallocation, whereas they warmly encourage regular rebalancing. Reallocation is when you change the percentage of assets invested in different asset classes. Rebalancing is when you sell or buy holdings in your account so that your asset allocation percentages remain consistent.

IRA - Rollovers and Transfers

Movers and Shakers

One attractive feature of IRAs is their portability -- if you follow the rules, you can move your money from one IRA to another, and from one institution to another, without tax penalties. Why would you want to do this? Here are possible scenarios:

• You move to new area and want a local bank to house your IRA.
• You are dissatisfied with investment performance at your current financial institution.
• Your financial institution imposes new fees or other conditions you don't like.
• You need the money for a short time (60 days or less).

When moving money from one IRA to another you have a choice between a trustee-to-trustee transfer and a rollover. Keep in mind that these must be done:

Traditional IRA-to-Traditional IRA or Roth IRA-to-Roth IRA

You may not roll one type of IRA into another type. You may, however, do a conversion or reconversion, which will be discussed in the next chapter.

What advantages does a Roth IRA have over a 401(k)?

Who is the Winner

 

A. The 401(k) for many investors it's by far the best way to fund their golden years. The Roth IRA should not be overlooked. The Roth IRA has a number of advantages, not just for young investors but for anyone who wants to maximize retirement options. Deciding whether to have a Roth IRA, a 401(k), or both depends largely on the quality of an investor's 401(k), and your current and expected future tax brackets.

The Right Match

The most important distinction between a 401(k) and the Roth IRA are taxes. Participants in a 401(k) get an immediate deduction for contributions, they'll pay taxes, at ordinary income rates, on withdrawals when they retire--and may be in a higher bracket. If you put money into a Roth IRA you don't get a tax deduction, but you can withdraw contributions tax-free. Once money has been in a Roth IRA for five years, earnings can be withdrawn without a penalty, provided you meet certain other requirements. To start a Roth IRA, your adjusted gross income must be less than $110,000 if you're single, and $160,000 if you're married and filing jointly.

Why You Should Roll Over your Money into an IRA if You Change Jobs

Here's why you should consider rolling the money into an IRA if you change jobs:

It keeps your money working for you on a tax-deferred basis. You continue to take advantage of the compounding power of your retirement money. If you cash out, you not only have to start over building a new retirement fund balance, but you also lose out on the time value of money. All those years your money has been compounding in your old account will be lost, and you can never recover that.

How To Do It: Two Easy Steps
The best way to do a rollover is through what is known as a trustee-to-trustee transfer. By using this process your money goes directly from your employer to your new IRA custodian. Your money stays within the protective envelope of tax-deferred accounts.

If the check is payable to (the employee), the employer has to withhold 20% for income tax".

Rules for Roth IRAs

Retirement accounts get added attention during tax-filing season. That's because you must put money in an individual retirement account no later than the April return-filing deadline. It doesn't matter whether your contribution is to a traditional IRA (tax-deductible or nondeductible) or a Roth IRA.

If you opt for a Roth account, you won't get an immediate tax break, but you won't pay any tax on your money when you eventually take it out. The Internal Revenue Service, however, has specific rules on just who can have a Roth IRA and how much money can be contributed each year.

Contribution limits
In general, Roth contributions are the same as traditional IRAs. Last year, you were able to contribute up to $4,000. (The maximum annual contribution stays at that amount for 2006.)

If you were 50 or older last year, you could have put in an extra $500. (That catch-up contribution amount is $1,000 this year).

However, you can't put more in any IRA than you make. So if your income is only $1,500, then $1,500 is the most you can contribute to a Roth.

8 Ways to Avoid the 10% Early Withdrawal Fee on Your IRA

1. Permanent disability of IRA owner
Money can be withdrawn without penalty in the event the IRA holder becomes permanently disabled.

2. Death of IRA owner
It's small consolation, but if you kick-the-bucket before you're 59 1/2 years old, your estate won't be hit with the 10% early withdrawal fee.

3. Withdrawals are used to pay non-reimbursed medical expenses
In the event of serious illness or injury that requires prolonged or expensive medical treatment, Uncle Sam will waive the early withdrawal fee on the condition that the expenses are in excess of 7.5% of your adjusted gross income.

4. Withdrawals used to help pay for first-time home purchase
Despite a lifetime limit of $10,000, this exemption can make it much easier for an IRA owner to buy a house.

5. Higher education costs
College can be expensive. Thankfully, certain higher education costs for you, your spouse, children or grandchildren can be withdrawn penalty-free. You may still owe federal income tax, however. For more information, read the Internal Revenue Service article, Notice 97-60 Using IRA Withdrawals To Pay Higher Education Expenses.

6. Money is used to pay back taxes to the IRS after a levy has been placed against the IRA
This is not the kind of exemption for which you want to qualify, but it may save you money if you find yourself in an uncomfortable position with the IRS.

7. Withdrawals used to pay medical insurance premiums
Out of a job? The rest of the world may be topsy-turvy, but rest assured, you won't be penalized for using retirement money to pay your medical insurance as long as you have been on unemployment for longer than twelve weeks.

8. Made on or after the day the IRA owner turns 59 1/2
Once you have reached the qualifying age of 59 1/2, you can make penalty-free regular withdrawals upon which to live.

Note:

the holder of an IRA is subject to a five year waiting period (measured in tax, not calendar, years). An investor could not, for example, deposit $3,000 in their IRA this year and withdrawal it next year penalty-free even if it would otherwise qualify as an exemption.

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Roth IRA or 401(k) - Who's the Winner

The 401(k) for many investors it's by far the best way to fund their golden years. The Roth IRA should not be overlooked. The Roth IRA has a number of advantages, not just for young investors but for anyone who wants to maximize retirement options. Deciding whether to have a Roth IRA, a 401(k), or both depends largely on the quality of an investor's 401(k), and your current and expected future tax brackets.

The Right Match

The most important distinction between a 401(k) and the Roth IRA are taxes. Participants in a 401(k) get an immediate deduction for contributions, they'll pay taxes, at ordinary income rates, on withdrawals when they retire--and may be in a higher bracket. If you put money into a Roth IRA you don't get a tax deduction, but you can withdraw contributions tax-free. Once money has been in a Roth IRA for five years, earnings can be withdrawn without a penalty, provided you meet certain other requirements. To start a Roth IRA, your adjusted gross income must be less than $110,000 if you're single, and $160,000 if you're married and filing jointly.

Some advisors stress that if an employer provides you a matching contribution of at least $0.20 on the dollar, the 401(k) should be your first choice. That's because the matching contributions amounts to an instant return of 20% with no investment risk. But if your employer provides less--or nothing at all--then focus on your current and expected tax liabilities.