Retirement Plan Rollovers
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Dear Participant, Your retirement plan will likely accumulate to become the largest financial asset you will have. Making good decisions will have a dramatic influence on the level of financial independence you will achieve. “Empowerment Determining what to do with a distribution from your retirement savings plan should include taking a close look at your complete retirement plan and all of your options. When you leave your employer you have four basic options on what to do with your retirement plan dollars:
Robert Recchia, ChFC, CLU
Through Education”
Phone: 858-753-4102 Fax: 858-487-2913 Email: bobr@cabenefits.com www.cabenefits.com www.lpl.com/ccb
1. 2. 3. 4.
Roll your retirement plan savings into a Rollover IRA. Leave your plan savings in your former plan. Move your plan savings to your new employer’s plan. Take a lump sum distribution in cash.
Which option is right for you? This brochure offers a list of issues to consider to help you make the right decision for your particular circumstances. With this basic information and with help from a professional advisor, you can make a good decision about your retirement plan distribution. The more you know about your alternatives, the more comfortable you will be with your financial decision. If you want help, contact us. We offer professional credentials, unbiased advice and more than 50 years of investment and financial planning experience.
Securities Offered Through Linsco/Private Ledger, member NASD/SIPC Financial Planning Services offered through SharMarc Financial Advisors, A Registered Investment Advisor
Choice # 1
Roll Your Savings into a Rollover IRA
Advantages:
A. B. C. D. Keeps your money growing tax-deferred. Avoids current taxes and early withdrawal penalties. Generally, you have many investment options Allows conversion into a Roth IRA (assuming eligibility conditions are met). E. Often, you have more payout options at retirement or death. F. Fees are sometimes lower. G. You can consolidate assets from several employer plans for simplicity.
Choice # 3
Move Your Savings to Your New Employer’s Plan
Advantages:
A. B. C. D. E. F. G. H. I. Same as advantages A & B in Choice #1. Significant protection of retirement assets against creditors. You may be able to make new loans from your account. You may be able to transfer loans from former employers to your new plan to avoid costly distribution penalties. By consolidating assets from several employer plans, you may find it easier to manage your assets. Generally, minimum distributions are not required until you actually retire and 10 year forward averaging is preserved. Your employer reviews the suitability and performance of your investment options. Some attractive funds are available in your plan, but are closed to outside investors. Load funds are available on a no-load basis.
Disadvantages:
A. If your plan offers “early retirement”, you may lose some favorable distribution options if you decide to retire between the ages of 55 and 59 1/2. B. You must make “Minimum Distributions” after attaining age 70 1/2 even if you are still actively working. C. If you were born prior to January 1, 1936, you will forfeit the option of electing 10 year forward averaging on “Lump Sum Distributions”. D. You are responsible for selecting the investments and monitoring performance. E. Assets in an IRA don’t always enjoy as good protection against creditors. F. There are additional considerations if your current plan contains appreciated employer stock (see choice #4). G. Loans are not available with IRA’s. H. Fees are sometimes higher. By using a conduit IRA you may retain the ability to roll your IRA back into a qualified plan with a future employer. This option may allow you to regain some of the lost benefits of rolling out of your current plan into a rollover IRA.
Disadvantages:
A. The primary difference from keeping your assets with your current plan and this choice will be the limits to your investment options offered by the individual plan. You also need to be aware of the specific rules of your new employer’s plan in regard to future withdrawals and distributions. B. If your current plan contains employer stock, you may not be able to transfer those assets to your new employer’s plan.
Also consider:
Review the items listed in Choice #2
Choice # 4
Take Your Lump Sum Distribution In Cash
Advantages:
A. Provides you with cash, although very expensive. B. If your retirement savings plan contains appreciated employer stock, there may be tax advantages to holding this portion of your plan assets in a taxable account. • If you take a distribution of the company stock, you will pay ordinary income taxes (plus penalties if applicable) on the amount that the plan paid for the stock. The unrealized appreciation will be taxed at the 20% maximum long-term capital gains rate. • If you continue to hold the stock, you continue to defer the taxes on the unrealized appreciation until the stock is sold. • If you were to die while still owning the shares of stock, your heirs would qualify for a step-up in basis and avoid tax on the unrealized appreciation altogether.
Choice #2
Leave Your Savings In Your Former Employer’s Plan
Advantages:
A. Same as advantages A & B in Choice #1. B. Significant protection of retirement assets against creditors.
Disadvantages:
A. B. C. D. E. New Loans are probably not available. Existing loans may be require immediate repayment in full. Assets are scattered and more difficult to effectively manage Inactive plans may be escheated to your State Government. You & your former employer will likely have trouble staying in touch through mergers, acquisitions and moves. F. It will be more difficult for you to manage your assets with multiple accounts.
Also consider:
A. Which plan offers the investment options best for you. Some plans offer fewer than 10 while others offer more than 40. B. Payout options at retirement or death. C. Fees. Whose are lower? Generally, if your account balance ever equaled or exceeded $5,000, you may leave your money until retirement. If not, your former employer may force you to choose options 1, 3 or 4.
Disadvantages:
A. Taxes are payable at your highest marginal tax rate (up to 39.6% federal and 9.3% California) B. Penalties are payable, if under age 59 1/2 (10% federal and 2.5% California) C. Federal tax withholding of 20% of your distribution is required, even if you plan to rollover to an IRA within 60 days. D. In general, Choice 4 should only be used as a last resort for dire financial need where money is not available from any other resource.