Insider Jeff Fleming

Get More out of Your Money

You've worked hard and planned well for your future. But are you maximizing your retirement funds? This week, Jeff helps you find your way through the maze of annuity plans.

Dear Jeff:
I'm taking an early out at age 55. And I'm in 403(b)-type annuity, working for a school system. My wife is five years younger and will work those five years. She is in a 401(k). I'm thinking of leaving my money in the annuity as long as I live. Is this the right thing to do? I've been getting a good return on my money. I'm well diversified--in Worldwide, in small cap, in variable annuity, in growth, and income. My wife can't draw from her 401(k) until she's 59-1/2 . So I'll be drawing on mine until she can draw on hers. Should she stay in the 401(k) until she has to get out at age 65? Or should she go into an IRA? Thank you,

William

Jeff Says:
Congratulations on your early retirement. It must be exciting for you . . . it must also bring new challenges. The first one may be determining how you would receive money from your 403(b) plan if you need it prior to age 59-1/2. Remember, there is a 10 percent penalty on withdrawals from retirement plans if you are younger. However, there are a couple of ways to tap into your retirement savings and avoid the penalty. The most common method is to take substantially equal periodic payments for the greater of five years or until you turn age 59-1/2. The fact that you don't need this money alleviates this dilemma in your case.

Now let's examine if you can leave the money in the annuity for as long as you live. Well, I think you have probably guessed by now that you cannot. This is because of the minimum distribution rule, which essentially means that you must begin to take withdrawals from your qualified retirement accounts beginning in the year you turn 70-1/2. You must take a distribution whether you need it or not, so you may not be able to keep it in the annuity for as long as you live.

Your wife is in a 401(k) plan and will also be subject to the same rules that I have described earlier pertaining to premature and minimum distributions. The only other question to address in her case is whether she should stay in the 401(k) until age 65 or transfer the funds to a rollover IRA. As an aside, remember that she is not allowed to move the funds until there has been a triggering event such as retirement. So, if she is not retired at age 59-1/2, she cannot withdraw the 401(k). But, when she does retire, there are two primary reasons to keep the money in the 401(k) plan. First, until the year 2000, she might be able to take a lump sum distribution and income average, which depends on her date of birth. Second, the investment accounts in the plan may be superior to other investments. By "superior," I am referring to possible lower operating expenses and higher returns. If income averaging is not viable in your situation and you can achieve the same returns from an IRA, then you should transfer your 401(k) to an IRA after she retires.

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