Rollovers

A ROLLOVER refers to the tax-free transfer of money from one qualified employer plan to another or to an IRA; from one IRA to another; or from a conduit (rollover) IRA into a qualified employer plan. The money in a rollover account maintains its tax-deferred status and should be accomplished in a direct transfer (plan to plan) to avoid automatic tax withholding.

When you leave your job, you are faced with many tough decisions. One of those decisions is what to do with the money you have invested in your retirement plan. If you were participating in your company-sponsored retirement plan (401(k) plan) and have at least $5,000 (as indexed by the IRS) in your account, you have a few options.

• You can roll the money into an accepting qualified retirement plan or an Individual Retirement Account (IRA). There are no taxes or penalties involved in a rollover.
• You can leave the money in the plan and continue monitoring your investments.
• You can take the money in a lump-sum distribution and not roll it into another tax-qualified vehicle. If you take the money, 20% in federal taxes will be deducted, and you will need to claim the total amount of the distribution as ordinary income in the year you take the money. You may also be subject to a 10% early withdrawal penalty if you are under age 59 1/2.

If you have less than $5,000 (as indexed by the IRS) in your account, your options are limited to the following:

• You can roll over the money into an accepting qualified retirement plan or IRA. There are no taxes or penalties with a rollover.
• You can take the money in a lump-sum distribution and not roll it into another tax-qualified vehicle. If you take the money, 20% in federal taxes will be deducted, and you will need to claim the total amount of the distribution as ordinary income in the year you take the money. You may also be subject to a 10% early withdrawal penalty if you are under age 591/2.

Regardless of your situation, the benefits of choosing a rollover account are far greater than taking a distribution. Please note that beginning in 2002 you are allowed to roll over after-tax money into another tax-qualified vehicle. Additionally, if your plan allows for distributions in kind, you should check with the receiving plan prior to taking a distribution to assure that those assets can be accepted.

The benefits of rollovers

One of the biggest benefits to rolling over your money into another qualified retirement plan or into an IRA is the continuation of your tax-deferred status. This means that as long as your money is invested in either of these options, you will not have to pay taxes on the money. As previously mentioned, the tax implications for taking a distribution from your retirement plan can be costly.

As with all retirement plans, at some point you will need to start taking distributions. However, chances are that by the time you start taking the money from your account, you will already have retired. As a result, you may be in a lower tax bracket, so you will pay less in taxes.

Another benefit of rolling your money into another qualified plan is consolidation. Your retirement balances will be in one account so it will be easier to keep track of your retirement dollars. Additionally, if your plan allows, you will also be able to access your money in emergency situations through a loan or withdrawal.

Other rollover account benefits include flexibility, more investment options and the added security that you are continuing to put money aside for your retirement.

What type of rollover account is best?

There are two types of rollover accounts - qualified retirement plan rollover and Individual Retirement Account (IRA) rollover. To decide which option may be best for you, you should compare the two and choose the one that best fits your needs and personal situation.

Qualified retirement plan rollover

With a qualified retirement plan rollover, your account will continue to grow tax-deferred. Through your new plan, you will also have access to a number of investment choices.

Making Sense of Rollovers

One of the biggest benefits of rolling over your money into another qualified retirement plan is the continuation of dollar cost averaging*. Dollar cost averaging is a convenient, systematic investment strategy to build a retirement portfolio for people who don't have a large sum to invest at one time. Here is how it works:

• The money you contributed to your previous retirement plan was taken from your paycheck before taxes were deducted. The money you currently contribute to your new plan will also be taken from each paycheck before taxes are deducted.
• Your contribution is invested at regular intervals into the investment options of your choice.
• Since the amount you invest remains constant, you buy more shares when the price is low, and fewer shares when the price is high. Because of this, you won't be investing everything at the best time - or the worst.

This happens every time you make a contribution to your 401(k) account and will continue as long as you are making contributions to your plan.

As mentioned previously, consolidation of your retirement balances is another benefit of rolling your money into another qualified plan. By consolidating your retirement balances, you can take advantage of a larger account balance that has the potential to grow faster with tax deferred compounding. Additionally, you will also receive quarterly statements from your plan's provider, making it easier to monitor your retirement portfolio.

*Periodic investment plans do not assure a profit and do not protect against loss in declining markets. Dollar cost averaging is a strategy that involves continuous investment in securities regardless of fluctuating price levels of such securities. The investor should consider his or her financial ability to continue purchasing through periods of low price levels.

IRA rollover account

As with a qualified retirement plan rollover, if you decide to roll over your money into an IRA, your money will continue to benefit from tax-deferred growth. You will also enjoy a greater selection of investment options. Keep in mind that with a conduit or rollover IRA, you retain the flexibility to transfer your retirement savings into another qualified plan at a later date. You will also be able to take penalty-free withdrawals in the future to pay for qualified higher education expenses or to purchase a first home (up to $10,000).

Rollover account facts

Hewitt Associates, a global management consulting firm, conducted a study in 1999 of 170,000 retirement plan distributions and found some shocking results. 68 percent of plan participants who changed jobs in 1999 took cash withdrawals from their tax-deferred retirement accounts rather than rolling over their balances into their new employer's plan or into an IRA. Most of the people who took distributions were still in their 20s.

Think about this shocking revelation for a moment - less than one-third of those who changed jobs in 1999 kept their retirement money in a tax-deferred savings plan earmarked for that stage of their lives.

To further illustrate, let's look at a hypothetical example of a person who took a distribution from a 401(k) plan versus rolling over the money into a tax-deferred savings plan like another qualified retirement plan or IRA. For this example, we are going to assume the distribution amount was $3,500.

The Cash Distribution, based on a distribution of $3,500 less 28% federal income taxes, 6% state taxes and the 10% early withdrawal penalty, would net $1,960. $1,960 invested in an investment earning an 11% rate of return over 37 years would net $93,155. Taxes and penalties do not get applied to account balances that are rolled over.

The Rollover Account, which assumes $3,500 is invested in a tax-deferred savings plan with investments that earned an 11% rate of return over 37 years, would net $166,348. This hypothetical example is based on a single person taking a distribution from a qualified retirement plan at age 25, and assumes a retirement age of 62 (37 years later).

When you leave a job and roll over the money you have accumulated in your retirement plan, you increase your retirement savings potential by continuing the tax-deferred compounding you have already started. Making the right choices for your situation today can benefit you during your retirement years. Contact Advanced Corporate Planning for information on:

• IRA rollovers
• 403B/TSA Plan Rollovers
• 401K Plan Rollovers
• 457 Plan Rollovers