If you're about to leave your job, and you've got a pile of money set aside in a 401(k) or other such retirement-savings plan at work, what should you do: Leave the money in the plan, or transfer it to an IRA?
That's one of the issues some national retirement-plan experts talked about at a conference in Boston, Mass., recently.
And there's no easy answer. There are benefits and drawbacks to each option, so it really depends on your circumstances, said Marvin R. Rotenberg, a nationally recognized authority on IRAs and other retirement-savings plans.
"One size does not fit all," Rotenberg said in an interview during the conference, which is sponsored by the American Institute of Certified Public Accountants, a trade group for CPAs nationwide.
Moving money from your employer-sponsored plan directly to an IRA is often the best choice for a variety of reasons. But that's not always the case. Consider the following scenarios:
Withdrawals: Suppose you're in your mid-to-late-50s and you're leaving your job -- perhaps because of a layoff, a buyout or early retirement.
If you transfer, or roll over, the money from your 401(k) to an IRA, then need to tap the account later on, you may be punished.
Why? If you withdraw money from an IRA before you reach age 59 1/2, you may face a 10-percent penalty (unless you qualify for a special exception), said Martin Nissenbaum, national director of retirement planning for the Ernst and Young accounting firm.
If instead you leave the assets in your 401(k) plan at work, then need to tap that account, you won't face a penalty.
Why? If you withdraw money from a 401(k) plan after you reach age 55 and "separate from service" (essentially leave your job), withdrawals escape the 10-percent penalty, said Rotenberg, national director of individual retirement solutions for Bank of America's Wealth and Investment Management division.
Required withdrawals: Once you reach age 70 1/2 or so, you must begin withdrawing at least a minimum amount annually from your traditional IRA. These are known as minimum withdrawals, or "required minimum distributions."If you don't make the required withdrawal, you face a punishing 50-percent penalty. It's an excise tax, applied to the difference between what you should have withdrawn and what you actually withdrew.However, if you don't need the money, you leave it in your 401(k) plan, and you keep working for that employer, you generally don't have to start making required minimum withdrawals from that plan until shortly after you actually retire -- even if you retire in your late 70s, 80s or beyond.All the while, the money in your account can continue to grow on a tax-deferred basis, Nissenbaum said.What if, in this situation, you also have a traditional IRA? Before you turn 70 1/2, consider transferring the money from the IRA to your employer's plan. That way, you'll be able to postpone required withdrawals until you actually retire -- even if that occurs years later, Nissenbaum said.You generally can use the same strategy if you had set aside money in a Keogh account while you were self-employed, then get a job with an employer and take part in the employer's 401(k) plan, he said.Either way, this strategy represents "a real opportunity to continue that deferral," he said.The stretch: If you transfer money from your employer's plan to an IRA, you generally may stretch out the life of the account, possibly across generations, Rotenberg said.The account builds wealth all the while -- even if you (or your beneficiaries) must make required minimum withdrawals in the meantime.If, however, you leave the money in your employer's plan, the "stretch" technique may not be available; your employer may require that the entire account be emptied within a fairly short time after you leave work.If that's the case, an IRA can be "the ideal vehicle" to shelter your retirement savings from tax -- to preserve the stretch-out feature, Nissenbaum said.That's especially true if you die, and the beneficiary is your child or someone else who isn't your spouse.If your spouse is the beneficiary of your 401(k) plan, he or she may roll over, or transfer, the money from the plan into an IRA -- even into another employer's plan -- without unwelcome tax consequences, Rotenberg said. But a nonspouse beneficiary doesn't have this option.Bottom line: If you have money set aside in a 401(k) plan, or other such retirement-savings plan at work, you've got some decisions to make -- and not just about how the money is invested.First, check the plan document to make sure you understand its provisions regarding withdrawals, transfers, rollovers and other such features. (Keep in mind that the rules for your plan may be stricter, in some cases, than what the law allows.)Once you know how the plan works, and you've studied its other features -- such as the number of available investment options, fees and such -- consider consulting a professional about your options and how to make them work to your advantage. And don't assume that the option that works best for someone else will also be best for you.Neil Downing is a Journal staff writer and author of "The New IRAs and How to Make Them Work for You" (Kaplan Publishing, 2002).Source: Providence Journal. Powered by Yellowbrix.
