ROLLING OVER YOUR RETIREMENT MONEY: GOOD OR BAD?
When you leave an employer you pass along all the important files,
turn in your office key, parking pass, ID badge and leave your
e-mail address behind. The one thing that you need to think about
long and hard before you leave it with your former employer is
your Retirement money: 401(k), profit sharing, 403(b), TSP, etc.
Yet almost forty percent of departing employees, ages 60 to 65
(and an even higher percentage of the younger ages), leave their
retirement money in their former employers' plans.
You stay put because you may feel a sense of loyalty, are unsure
of how to transfer these moneys to another plan, are fearful of
assuming direct responsibility for the investments, or simply
are not aware that you can move all or some of the money. You
should know that not taking your retirement money when you leave
could jeopardize your future in retirement. In what follows, we'll
discuss the pros and cons of taking your money with you and what
you should do if you decide to move, or roll over, your pension
A scant one hundred years ago retirement was not a pressing matter
because most people simply did not live long enough. During the
1900's the life expectancy of Americans increased by twenty-five
years and is now resting at almost eighty years - slightly longer
for women than men. There is about a sixty percent probability
that one of a 65 year old couple will reach age 90. This means
that retirement today can easily last twenty-five years or longer
with each new medical discovery prolonging the life span further.
During these twenty-five or more years of retirement there will
be economic booms and busts, cycles of rising and falling interest
rates, bursts of inflation, and most likely one or more medical
emergencies. The facts are that most Americans have not properly
prepared financially for the long and expensive period of retirement.
Retirement is the most expensive purchase you'll make in your
lifetime - even greater than your home or education - and the
only major purchase that you'll not be able to borrow to pay for.
The "boomer" generation of over seventy-five million
started turning retirement age in 2006 and will continue doing
so at a pace of four million a year for the next eighteen years.
Someone turns age 60 every eight seconds in America - that's over
10,000 daily (the size of a small city), over 325,000 a month
(a not so small city) and almost 4,000,000 annually (a very large
city). This demographic trend means that the demand and the price
for things used by retirees in America are going to explode over
the next several decades. This demographic bubble combined with
the increase in life-span makes it imperative that you get absolutely
the most from your retirement moneys. Your retirement savings
must work hard and smart so that you do not outlive your money.
That's why it's important for you to understand all the options
associated with your retirement plans. Whether to sit, stay or
"roll over" your retirement money is a crucial decision
that you must address.
According to Hewitt Associates LLC,
in 2004 thirty-nine percent of the 60 to 65 year old participants
in 401(k) plans left their money in the plan upon retirement with
thirty-two percent doing roll over and twenty-nine percent taking
lump sum cash distributions. This speaks volumes that more than
one in three near-retirees continues to invest in their 60's and
beyond as if they were still working. They're neglecting to consider
they may not have time to weather the return to a good market.
The current stock market high, as measured by the Dow Jones Industrial
Average ("DJIA"), was reached in January 2000 and as
the summer of 2006 ends, the stock market is still considerably
below this six-year-ago level. Not only is "time" not
a friend, unless your retirement savings are wisely managed, it
could very well be your enemy: an enemy of poor choices that could
lead to you outliving your money.
The investment habits of a lifetime have prompted over one-third
of the 60-65 year old departing workers to leave their money in
their employers' plans. While this may be the proper thing to
do, it also may be lethal if you can't tolerate the exposure to
market risks. If your plan contains your employer's stock - and
about fifteen percent do (including the victims of Enron) - you
might not enjoy the "diversification" that is the hallmark
of many retirement savings plans. The need to change investments
in response to aging was well thought-out by our lawmakers as
they provided for transfer of pension money so that risk could
be better managed, and your retirement money could be brought
more directly under your control. The process is called "retirement
money roll over" or simply "roll over". A roll
over means taking a distribution from one tax-deferred retirement
plan and depositing those funds into another eligible retirement
plan without triggering a taxable event. Financial professionals
will advise you to analyze this option when you retire, or if
you're still working and change jobs.
What are Your Choices?
Your options depend upon (a) the type of plan you have and (b)
how your employer has limited your choices. As indicated above,
all plans must fit inside the broad government rules to qualify
for special tax treatment and you can determine the parameters
of your plan by consulting your Summary Plan Description. Essentially,
the choices are:
1. Move (roll) all or part of the money to another plan
2. Leave the money where it is
3. Take all or some and pay the taxes
4. A combination of one or more of the above
If you decide to roll over your plan, you can do so with a "direct"
trustee-to-trustee transfer which means you will instruct your
current plan administrator to transfer your money directly to
the new plan without the money coming through your hands. This
is by far the best way to execute a transfer because there is
never any question about the transfer being taxable or violating
the "timing" rules of the Tax Code. The other avenue,
and less desirable one, is an indirect transfer whereby you receive
the funds and then pass them along to the new plan administrator.
This could involve your employer withholding a percentage which
you will either have to replace before year end or pay taxes on.
There is also a 60-day time limit to get the transfer completed.
Accordingly, it is always best to use the direct trustee-to-trustee
transfer method if at all possible. The money can be moved to
your new employer's plan if the new plan allows, or it can be
moved to an IRA.
There is also choice associated with inheriting a pension plan
or IRA as the spouse or beneficiary of the deceased. The most
important thing to keep in mind is that the spouse of a deceased
plan participant has considerable latitude in the options running
from lump-sum withdrawal to adding the money to their own IRA.
There are numerous horror stories about spouses making the wrong
choices at the death of the plan participant because they either
did not seek advice or relied on the advice of a non-professional.
If you find yourself in these circumstances, you should immediately
seek help from a professional financial professional or elder
attorney that understands the options and the time frames involved.
If you are a non-spouse beneficiary there are also options available
- running from immediate lump-sum withdrawal and tax payment to
deferred withdrawals over the remaining life of the beneficiary.
With planning, even a second beneficiary can "stretch out"
the benefits over the remaining life expectancy of the first beneficiary.
The purpose here is to alert you that options are available that
require an expert opinion if your objective is to take full advantage
of the tax provisions allowed by Congress and the IRS. We can't
stress too strongly that this is one area of your retirement where
doing it yourself can be extremely hazardous. The rules may be
complex but there are ways the taxpayer can maximize the tax shelter
if they get savvy advice. The fewer taxes you have to pay, or
the longer your money can work tax-deferred, the longer it will
last for your retirement and/or the more you can leave to your
heirs and loved ones.
What are the Reasons to Roll Over my Retirement
Whether or not you can roll over your pension money will generally
depend if you meet one of the provisions that can trigger a roll
over. For example, retirement, disability, leaving the company
for another, being downsized, and various other events generally
entitle you to move your money. Before we discuss the reasons
to roll over your retirement money, let's be very clear that each
of you are different, have different needs, and one size does
not fit all. What is good for you may not fit your neighbor: the
reason they roll over their retirement money may be the same reason
that you use not to roll over yours. If you have more than enough
to comfortably fund your retirement years, your concerns may be
directed more toward what you leave your heirs and loved ones,
whereas others are laser focused on making sure they don't outlive
the limited resources they have. As is always the case, there
are also good reasons not to roll over your money, and we'll discuss
these as well. At the end of the day, the best decision for you
will depend on your circumstances. If you no longer work at a
company that holds your retirement money, you must assess each
of the following reasons regarding roll over. These reasons are
listed in no particular order of importance because the one that
is important for you may be unimportant to others.
Financially Troubled Companies
Companies of all sizes have to weather the economic rapids, hope
their management stay focused on profitability and contend with
lawsuits, technology changes and government regulations. The upshot
is that they may become financially troubled. In an economic climate
where General Motors is fighting for its financial life, several
major airlines are in bankruptcy, and large American corporations
have failed because of fraudulent management, there is no safe
harbor. If your ex-employer is where your retirement money is
being safe kept and it suffers the fate of becoming financially
troubled, this could spell trouble for you. This is especially
true if your employer-sponsored retirement plan offers "company
stock" as one of the investment options you have selected.
At this time, about fifteen percent of all employer-sponsored
pension plans include their company stock as an investment option.
Your Plan might prevent you from withdrawing money except upon
advance notice or not before a certain future date; thus, you
could find your money "locked up" due to a bankruptcy
or squandered by a corrupt company official. In the case of Enron
it was because they were in the process of changing third party
administrators. While you might be entitled to some government
bailout, more than likely you will not because the Pension Benefit
Guaranty Corporation is (a) reserved for defined benefits plans
and (b) has a significant deficit of its own to overcome. If you
roll over your money, you may still be concerned about your former
company but your retirement money is safely out of harms way.
Companies Merge and Get Bought
Remember, many of the rules that govern your retirement plan
are imposed by your employer but are still within the broad rules
imposed by the government. These rules can change if your company
is bought by or merged into another company. The changes may not
be to your benefit. This is not a matter on which you are going
to get a vote; therefore, if you are no longer employed at the
company, it would be wise to investigate moving your money. Once
it is rolled over to a self-directed plan or your current employer's
plan, you no longer have the risk of your old company being bought
or merged and new rules established.
You May be Able to Benefit from a Roth IRA
We'll talk more about the Roth IRA below, but at this point
you should know that the Roth offers you tax-free earnings and
tax-free withdrawals. Accordingly, for some individuals the tax
advantages are simply too attractive to pass up, or the estate
planning benefits exactly meet your needs. If your money is now
in a 401(k), 403(b) or other type of employer-sponsored plan,
you must first roll the money into a traditional IRA and then
as a second step into the Roth. At this time, you cannot exceed
certain income limits when moving to a Roth, and after your money
is moved there are both age and time limits before you can withdraw
tax-free. The provisions of the Roth IRA are changing in tax year
2006 to be available for certain employer-sponsored retirement
plans and in 2009 the income limits are due to change. You'll
want to keep your eye on these if you think movement to a Roth
will be beneficial. The Roth IRA is not for everyone but it is
a great benefit to a certain class of retirement-minded people,
and you could very well be one who can benefit.
Diversify your Investment Portfolio
Employer-sponsored retirement plans must offer investment choices;
however, these choices can be very narrow and the performance
results less than optimal. Nonetheless, you are restricted to
putting your retirement money into the options provided by your
employer. If you roll over your money to an IRA or another plan,
you could have a broader range of investment choices and access
to a professional money manager of your choosing rather than one
picked by your ex-employer. This is especially important as you
approach, or enter, retirement because you will want to move your
retirement money away from "risky places" to "safe
places". This tendency to remain exposed to market, credit
and interest rate risks is one of the major mistakes made by retirees.
While the choice of "market" investments is understandable
due to the bombardment of advertisement from Wall Street and generally
a good choice during your working years, when safety of principal
becomes paramount in retirement, the risk of the "market"
should be in your rear view mirror.
Employer-Sponsored Plan may have High Expenses
As mentioned above, your employer sponsors the plan but the day-to-day
administration and investment functions are handled by a third
party that is paid fees for doing the paperwork or managing the
money. Not all companies have the expertise to choose wisely and
oftentimes are convinced to incorporate high fee products as well
as non-competitive fees for the administration. For example, many
plans offer variable annuities which generally have the same underlying
assets as mutual funds but much higher fees - this is especially
true of 403(b) and 457 plans that are offered to teachers, local
government employees, and workers of non-profit organizations.
Many companies, both large and small, never put out for bid the
services offered by their third party administrators, and over
the years these creep above comparable fees of others. You pay
for these fees in the form of lower earnings because many of the
fees associated with an employer-sponsored plan are assessed to
the participants. By rolling over your money, you can avoid these
high fees and thus have the opportunity to realize better earnings.
More earnings mean a larger retirement nest egg and a more secure
Consolidating Your Retirement Money in One Location
If you are typical, you have probably changed jobs several times
during your career and may have your retirement money scattered
among several previous employers. Employers are required to retain
your money if it amounts to more than $5,000, so sometimes the
path of least resistance - though not necessarily the best path
- is to leave the money behind. This opens the door for you, or
your employer, losing track of your money. While you may think
this impossible, there are numerous cases where the employer lost
track of previous employees' addresses and the company was subsequently
bought, merged, failed or went out of business, and the misplaced
employees never recovered their retirement money. This is simply
bad personal business and if this is your situation, you should
correct it immediately. Also, consolidating generally means you'll
lower the management fees assessed against your retirement accounts.
By rolling over your money to your current employer's plan, if
such is allowed, or into a consolidated IRA you can be confident
it will not be lost, management fees will be less, and it will
be working hard and smart for your retirement. Plus, once the
money is under your control after the roll over, it is portable
at your discretion.
Doing a retirement savings plan roll over should be undertaken
with the advice and counsel of a financial professional that specializes
in retirement planning. If you have chosen to let your money sit
with your previous employer, you may be taking risks that you
cannot afford. The investments you have chosen may no longer be
appropriate for retirement and the non-investment risks like mergers,
fraud, loss of options, taxes and estate benefits are simply too
great to ignore. The process of assessing your options is fairly
straightforward and if action is needed, it too is painless; however,
this is not an assignment you want to undertake without professional
guidance. If you are staying put because of loyalty to your lifelong
employer, your sentiments are to be complimented; however, when
it comes to your retirement savings, your first loyalty must be
to you and your loved ones. The retirement planning experts are
unanimous in their beliefs on this matter because they agree:
"money in employer-sponsored plans should go with you when
you leave the company".
If you would like assistance with your IRA or 401K roll-over,
please contact an Allied Roth retirement counselor.