Retirement & Tax

Retirement Asset Rollovers

Ron Gambassi
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September 4, 2009

The situation:

With a record number of employees leaving their jobs, some by choice, many by force, there are a myriad of questions they find themselves needing to answer.

After a few of the most fundamental ones such as:

Are my assets sufficient to pay the mortgage?
What are my options for health insurance and how much will it cost?
What standard of living can I sustain?

There is another important question we’ll start to answer here…What should I do with the assets in my retirement account?

Leaving a job in the commercial sector might mean you have 401(k) assets, or if you were a public sector employee you may be lucky enough to have a pension and a 403(b). Perhaps you hold a retirement profit sharing account from employement in a medical practice.

Some key questions:

Regardless of the type of retirement account, one thing is certain; your assets need a home. They may need a new home, or they may be just fine remaining in the current one. Still, here are some questions you need to answer:

1) Can I remain in my current plan even though I may no longer be able to contribute to it?
2) If I can stay in my current plan, should I?
3) If I decide to, or are required to move the assets to a new plan, how do I do it?
4) Where should I move the assets, and into what type of investments?

Question 1 is easily answered by a review of the plan literature. This can usually be found on the employer or plan administrator’s website. If that doesn’t work contact your benefits representative or HR department.

Question 2 starts to be a bit more complicated. It involves a review of how your investments have performed over time, especially as compared to the benchmark averages (e.g. S&P 500, Dow Jones Industrial, etc) of similar investment options. Some plans offer a multitide of investment choices while others can be as restrictive as only having a company stock investment option. If you are in a restrictive plan chances are you should not walk to the exit; you should run to it. I’m not saying every company is an
Enron-esque timebomb but this is your future and you just don’t mess with that.

Now, regarding Question 3…You are faced with a decision to “transfer” your assets or do a “roll-over”. These may sound like one and the same though in the world of retirement asset treatment they hold very specific meaning.

In a roll-over you take receipt of the assets for up to 60 days before reinvesting them in another retirement plan. In a transfer the assets are transferred directly from one custodian (read: investment company) to another one.

Examples:

Sara has left a Fortune 500 company and decides to move her $260,000 of 401(k) assets from her former employer’s plan to a Traditional IRA (Individual Retirement Account). Sara will direct her 401(k) administer to move the funds directly to her new investment company. Sara is doing this via a “custodian-to-custodian” transfer.

Jack leaves his employer where he had $40,000 of traditional IRA assets. He takes possession of those funds via check made out to him. Within 60 days he sets up and deposits the funds into his new IRA and all is well. By taking receipt of the funds and then depositing them, Jack has done an IRA “roll-over” transaction. Ah, a pretty sweet deal you say. Jack can put the money in the bank and earn some interest before rolling over the proceeds to his new account. True, but he might also miss a run-up in the market if his assets are not invested in time. Of course the opposite could be true as well. Jack has to be careful though. If he forgets to get this done within the 60 day window he’ll be very unhappy with the tax bill he gets from Uncle Sam (who defintely will not forget to send it). Oh yeah, one other thing…Jack can’t do this same type of transaction again for another 12 months. The IRS is picky about this stuff.

Summary:

Generally speaking, if the person takes possession of the assets prior to reinvesting them (within 60 days of course) it is considered a roll-over. If the assets are moved directly from one custodian to another, never passing through the account owner’s hands, it is considered a transfer.

As with all things IRS, there are exceptions to these rules and definitions. For example, a transfer from a “qualified plan” (e.g. 401(k), 403(b), Profit Sharing plan) directly to a new custodian is indeed a transfer, however, for accounting purposes the IRS calls it a “roll-over”. Nothing changes about the tax treatment though you will get a 1099 form from your former employer that needs to be filed with your tax return. Tax rules…don’t ask.

Next steps:

Asset allocation is the key to starting to answer question 4. The need for diversification among your investments is essental. Some stocks, some bonds, international and domestic equities are some of the elements of a well diversified portfolio. With whom you invest should be determined after a careful analysis of the manager’s style, fee structure and ability to match your risk tolerance with an appropriately structured portfolio.

If you are a do-it-yourself investor, the web has a wealth of resources you can study and learn. Do your homework, understand the rules, and execute your plan. If you need help, find a reputable investment advisor, accountant, tax attorney (if you are affluent enough to need one) or one of the big firms such as Vanguard, T. Rowe or others.

Do yourself a favor though; Be sure you understand how the person or firm helping you is compensated. Many put their interest ahead of yours and are not legally bound to act as your Fiduciary. Understand how much they will make from the immediate transaction and from all follow-on fees. Make your decision in the quiet of your own home and take action knowing you’ve done the proper due diligence.

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