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To Rollover or Not?
Jeff helps a reader decide what to do with a former employer's retirement plan. Also, can a new home shelter your capital gains liability?
Dear Jeff:
I'm 57 years old and in reasonably good health. My husband has been employed 30 years for the same company. As his spouse, I will also get 50 percent of his retirement from his company. Together we should have an adequate retirement income. My Social Security credits are paid in, but my retirement income will be reduced by the amount of the Social Security income.
I also have money in a former employer's retirement plan. I'm pondering: a) taking the money out of my retirement plan and rolling it directly into a traditional IRA, or b) taking the lump sum (at a 20 percent loss up front) and investing it in stock-index funds. There are no guarantees with an IRA and my heirs would have to pay taxes on that. The problem is -- I don't know which would be the best thing to do.
Jeff Says:
Retirement plan distribution planning can be very challenging, especially when you have more than one plan to take into consideration, which seems to be your situation. The variety of plan types have very different rules as to what options you may have with regard to withdrawal rights and distribution methods.
You said that your husband has a retirement plan with his employer from which you also expect to receive an income. Lacking specific details about it, I would assume that this is a type of defined benefit plan. With a defined benefit plan, you would have much less control over the payout options than with most defined contribution plans, such as a 401(k) plan. The trade-off is that you will receive an income from this plan for the rest of your life, regardless of how long you live.
Regarding your retirement plan: If you take the withdrawal as a lump sum, the trustee of the plan is required to withhold 20 percent. However, if you are in a higher tax bracket, you may actually owe additional taxes. If you roll the money to an IRA, you will not have any taxes due until you withdraw the funds, so you would actually have more funds available from which to generate an income.
The rule of thumb used by most planners is to postpone taxes for as long as you can. Yes, you will ultimately pay taxes on the money, but the power of compounding in the meantime can provide significant growth advantages to your portfolio.
Also, see a previous column on IRA options.
New Home a Tax Shelter?
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