Rollovers and Investment Plans

Prior to retirement, you should have already found a financial advisor with whom you feel comfortable. In fact, we recommend starting several years in advance for two reasons. First, you want to be sure the advisor is right for you. Over the course of several meetings, you can get a feeling of whether the advisor is planning a retirement strategy that meets your specific needs. Second, you want to be sure you have a workable plan in place, and this can take some time to prepare and develop.

Rolling Funds from Your Company to Your IRA

Depending on the company you have been working for, how you initiate the process of transferring your 401(k) profit sharing or lump sum pension will vary.

Most companies will provide the necessary forms that will give you the various options that are available and the consequences of each. Although this paperwork may seem overwhelming, the forms you will be completing are relatively simple.

The key questions are:

• Do you want to take the money out of the 401(k) plan or leave it there?
• If you take it out, how do you go about doing so?
• How do you avoid taxes and penalties?

If your plan is to roll the funds into an IRA, which is generally recommended, then the administrator of the plan will want to know to whom the check will be made payable. The check should be made payable to your new custodian chosen by you and your advisor. The key is to roll over the funds without having the check payable to you. If you are under the age of 59½ and the check is made out to you, you will be subjected to 20% withholding for income taxes. When you file your tax return, you will pay ordinary income tax plus a 10% penalty tax on the amount taken. If you are over 59½, you will not incur the 10% penalty.

If you are over the age of 55 and your employment has been terminated, you can leave the funds in the 401(k) at your company and take distributions without the 10% penalty. You will still need to pay ordinary income tax. If you think you’ll need some of the funds prior to reaching 59½, this may be a good option.

You can also pull money out of an IRA without penalties before the age of 59½ by taking equal and substantial payments over a five-year period or until you are 59½, whichever is greater. If, for example, you start taking money out at age 56, you would have to take the same amount of money out each year until you were 61. The amount required to take under these IRS rules is determined on the basis of your life expectancy. While money can be taken out if necessary, we do not recommend that you start withdrawing from a retirement plan too early because you will potentially need the money for many years to come. Remember, we are living longer than in previous generations.

As for pension plans, companies typically offer either a lump sum or a monthly benefit. There are some drawbacks to monthly benefits. First, while the benefit can go to your spouse should you die, there is no provision for where the money will go when both you and your spouse die. Also, if the corporation does not provide for a cost of living increase, which most don’t, then your monthly benefit will be worth less over time. Another concern, especially today with so many companies struggling to stay afloat, is what if the company goes bankrupt? While pension plans are guaranteed through the Pension Benefit Guarantee Corporation, the insurance coverage will not match the plan dollar for dollar, so again, you’ll end up receiving less money. Therefore, I almost always advise that you take a lump sum pension payment. You’ll need to roll it over into an IRA and be careful about how you manage it, but you’ll have the full amount at your disposal.