To Rollover or Not to Rollover—when talking about your retirementfunds, it’s a question that can be overwhelming. Favorabletax laws enable you to move your retirement plan assets withyou when you pursue a new career opportunity or retire. However,sometimes the process and your options can seem complicated, especiallywhen you are dealing with the stress that naturally occurs ina time of transition. A rollover––sometimes called a direct rollover—from an employer–sponsored retirement plan, offers an excellentway to consolidate and control your retirement assets. Federal taxlaws give you this freedom to personally determine how to handleyour assets; however, more freedom brings more responsibility.
Managing your retirement assets is a big undertaking, so, beforeyou decide what to do, remember why you chose to participatein your company retirement plan. At some point in time, youmade the decision to begin investing for retirement through youremployer. Now, in a time of transition, you face the big responsibilityof managing the retirement assets that you have accumulated.Because these decisions are so critical, many people will seek advicefrom a financial consultant when leaving a job. A financial consultantwill help you outline your financial objectives and assess youroptions, ensuring you make the best possible choice.
If you are changing jobs, you typically have four options regardingyour retirement funds:
- Leave the assets in your former employer’s plan. The employer may not make this option available for balances that are below $5,000.
- Transfer the assets to your new employer’s plan. Currently, tax laws make this option available, but each employer has its own rules for what assets they will accept into their plan.
- Take the cash. You will pay substantial taxes and if you are under 59½, you will pay an additional 10 percent penalty tax.
- Roll the assets into an IRA. Assets from a 401(k), 403(b), profitsharing plan, and a 457 plan can all be invested in a rollover IRA.
A survey conducted by the Bureau of Labor Statistics in 2006indicates that, on average, Americans change jobs 10 times duringtheir careers. Therefore, consolidating retirement assets from severalplans can prove to be a valuable tool for maintaining controlover your funds. Typically, the transfer of retirement assets into arollover IRA is the most appealing option. This option makes sensefor several reasons:
- Avoidance of substantial taxes and penalties. Transferring the money to a rollover IRA avoids the substantial tax consequences you would incur if you took the cash.
- Preservation of tax deferral. Taxes will continue to be deferred until you begin making withdrawals from your account in retirement. Earnings generally compound faster when taxes are postponed.
- Access to more investment options. Typically, employer plans offer a much narrower range of investment options than your rollover IRA will provide.
Retiring?
If you are retiring, your goals will likely differ from someone switchingcareers; more specifically, your main objective may be to providean adequate stream of retirement income. You might be primarilyconcerned with:
- Outliving your assets
- Losing financial independence
- Protecting your income
Assessing all your rollover options with the aid of a financial consultantis in your best interest, as there are several realities you faceas a retiree: experts estimate that 70 percent to 90 percent of preretirementincome will be needed to maintain your current lifestyle,and you can no longer assume that Social Security and pensions willprovide all of the future retirement income you need. Additionally,you need to plan for more years of retirement, because modern lifeexpectancy climbs higher every year. In fact, for a couple retiring atage 65, there is a 91 percent probability that at least one spouse willlive beyond 80 years of age, according to the Society of Actuaries,2006. Further, the US Census Bureau maintains that there will bean estimated 1,000,000 people age 100 or above in the US by 2030,compared to just 60,800 in 2007.
If you make the decision to invest in a rollover IRA, you willhave many different options when you begin withdrawals or distributionsfor retirement income. The specific options available to youwill depend upon your age at the time you wish to receive distributionsfrom your plan.
Preserve your assets with the aid of a financial consultant:
Speak with your financial consultant when you are changingjobs or retiring, as their expertise will prove to be an invaluable toolas you take control of your assets. Your consultant can help you decidewhat to do with a distribution from your employer plan andchoose a solid investment strategy that best suits your goals, timeline,and risk tolerance. It’s likely taken you a lifetime to accumulateyour retirement savings, so you owe it to yourself to work with anexpert so that you can comfortably and confidently plan for yourfinancial future.
