Financial Planning for August 2002

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Employees in Transitions. What to do with Retirement Plans?
With individuals increasingly becoming responsible for their own retirement savings, its critical to know how best to protect plan assets during employment transitions. If a career change or retirement lies on the horizon, this may be the time to consider a rollover to a traditional Individual Retirement Account.

Individuals who receive eligible rollover distributions from qualified retirement plans may wish to establish an account to directly or indirectly rollover the distributed assets. A rollover to a traditional IRA can help delay the tax liability, expand investment flexibility and extend opportunities for tax-deferred growth.

There are several alternatives available to individuals who choose or are required to take retirement plan distributions. Depending on your needs and circumstances, you may choose to:

  • Leave assets with a current employer. This may be desirable if you are please with the plan's investment choices. But many plans offer limited choices and/or impose restrictions on how often investments may be reallocated.
  • Rollover all or some to a new employer's plan, if allowed. This prevents immediate tax consequences and keeps money earning on a tax-deferred basis. But the same limitations of the new plans investment choices apply as well as restrictions on changing investments or accessing funds.
  • Take a lump-sum distribution. This may be appropriate if you are eligible for favorable tax treatments such as net unrealized appreciation, capital gains rates or forward averaging. But this alternative can seriously diminish retirement savings by subjecting many individuals to ordinary income tax and imposing a mandatory 205 withholding plus a 10% penalty for accountholders under age 59 1_(or under age 55 if you are separated from service prior to attaining age 55).

A fourth alternative is rolling the assets over to a traditional IRA. An IRA allows you to:

  • Delay tax consequences until retirement. Distributions rolled over to a traditional IRA are not subject to current-year income taxes or early withdrawal penalties. Distributions take after the rollover but before age 59 _ may be subject to income tax and penalties unless taken for qualified purposes.
  • Maximize tax-deferred growth. Assets rolled over to traditional IRAs continue to grow on a tax-deferred basis until withdrawn.
  • Expand investment flexibility. Traditional IRAs offer a broad range of investment choices and the flexibility to reallocate investments, as desired, in response to changes in market conditions or personal circumstances.
  • Take withdrawals and distributions as desired, without obtaining permission from plan administrators or human resources departments. Accountholders under age 59 _ may be subject to early withdrawal penalties. At age 70 _ accountholders must begin taking required minimum distributions from traditional IRAs.
  • Consolidate retirement plan assets for improved management and record keeping.
  • Leave options open. Rollovers to traditional IRAs give accountholders time to consider their alternatives without facing undesirable consequences, such as tax penalties. Accountholders may eventually choose to rollover qualifying distribution top a new employer's qualified plan.


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