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| Rollover and Distribution Options |
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| Make an Informed Choice |
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Chances are, at some point in your life, you'll need to decide what to do with the assets you've accumulated in your company's retirement plan. For some individuals, company-sponsored plan assets, such as 401(k)s and defined benefit pension plans, make up the largest portion of their retirement nest egg. Despite this, many people don't know what to do with these assets when a job change occurs or when they retire.
Whatever your situation, you have a number of choices to make about your retirement plan assets. We encourage you to review this section to fully understand your options and help you make the most informed decision.
Get the Guidance You Need
Fortunately, you're not alone when it comes to getting the answers you need. The Retirement Consulting Group, a service provided by New York Life Insurance Company, is a dedicated and experienced team of retirement consultants who will provide personalized and objective assistance regarding your plan distribution.
These specialists understand the ins and outs of each distribution option, and are well-versed in today's retirement distribution strategies. They'll listen closely to your situation and apply their knowledge based on your unique needs.
When you dial 1-866-401-2IRA, your rollover consultant can provide:
- A detailed review of your choices, the tax consequences, and considerations for each option.
- Answers to specific questions concerning your particular distribution.
- A discussion of which option may be best, given your unique needs.
- A strategy to help you implement your distribution choice, including how to open an IRA rollover.
- Details on the process and timing needed to execute your plan.
Taxes and Penalties
Taking your retirement plan savings in cash can cause you to incur a 10% early withdrawal penalty if you're under age 59½. That means if you saved $50,000 in your retirement plan and made no after-tax contributions, you would lose $5,000 to the IRS. And that's not all—your distribution will be subject to income taxes. Your employer is required to withhold 20% of your distribution assets for federal income taxes. When all is said and done, you could lose close to half of your savings paying penalties and taxes if you take your distribution in cash.
| A Heavy Price to Pay |
| You could potentially see your retirement account distribution cut in half by taking your money in cash. |
| Distribution |
$50,000 |
| Less 10% early withdrawal penalty |
$5,000 |
| Income tax |
$14,000 |
| State income tax |
$2,500 |
| Net distribution after the penalty and taxes: |
$28,500 |
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Benefits of Tax-Deferred Investing
There's another important factor to consider when deciding whether or not to take your retirement plan assets in cash. Tax-deferred investing can make a substantial difference in your account's value over time. When you keep your money in a tax-deferred plan, the earnings from your investments are automatically put back into your account. In addition, as the term implies, your contributions and earnings are not taxed until you take a withdrawal. You will have to pay taxes when you withdraw money from your account, but at that point you may be in a lower tax bracket.
Tax-Deferred Compounding in Action
To put this concept in perspective, consider this hypothetical example (illustrated above). Mary leaves her job after accumulating $50,000 in a qualified tax-deferred account. If she takes the money in cash, the early withdrawal penalties and income taxes would reduce the amount to $28,500. Now assume she invests the money in a taxable account earning a hypothetical 8% a year. After 30 years the account could grow to $150,469.
But what if Mary's original $50,000 is rolled over into another tax-deferred account, such as an IRA, also earning a hypothetical 8% a year? After 30 years of benefiting from compounding and tax-deferred investing, her account could grow to $503,133—more than double the amount of "cashing out" and reinvesting in a taxable account.
Assumes a 28% federal tax rate, 5% state income tax rate, 10% early withdrawal penalty, and 8% hypothetical return. Not an indication of any specific investment.
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| Key Rollover Considerations |
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If you choose to move assets from your company's retirement plan to an IRA or another company's plan, you can typically roll over the full value of your account, less any loans (some plans do permit a rollover of loans) and after-tax contributions you previously made. After 2001, employer after-tax contributions may be rolled over into an IRA. Speak with a human resources representative at your previous employer to learn the exact amount that you can roll over.
Direct Rollover
By initiating a direct rollover, or "trustee-to-trustee" transfer, you are instructing your previous employer to make your distribution payable to the new IRA custodian or retirement plan. Since the money is sent directly to the appropriate party, it is not subject to current income tax—100% of your money is rolled over and continues to compound on a tax-deferred basis.
Indirect Rollover
With an indirect rollover, your previous employer makes the distribution payable to you, less 20% that is withheld for taxes. You then have just 60 days to roll the money over to your new IRA or retirement plan. To make a full rollover you must personally deposit the 20% amount that was withheld from your distribution. Otherwise, the IRS will consider that portion to be a distribution, and you'll have to pay taxes, plus the 10% early withdrawal penalty (if you're under age 59½) on that amount.
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| Option Details |
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To help you decide your best course of action, we've provided the following detailed explanations for each of your options. View the pros and cons of these options.
Taking Your Savings in Cash
You may be unpleasantly surprised if you cash out your retirement plan because your distribution will be treated as current income and will be subject to federal, state, and local income taxes. You'll also incur a 10% early withdrawal penalty if you're under age 59½.
In addition, your money will lose its tax-deferred status. Therefore, even if you take your net distribution and reinvest it in a taxable account, you'd potentially be worse off than if you rolled the money into an IRA.
If you choose this option:
- Calculate the effect of any applicable taxes and penalties before requesting the distribution
- Speak with your investment professional or tax advisor regarding your potential tax liabilities
- Call your plan's toll-free number to initiate the process
- Complete the paperwork from your previous employer to authorize the distribution
Rolling Your Savings into an IRA
For many people who are changing jobs or retiring, an IRA rollover is the most viable option, as there are numerous benefits. The money from your old plan will continue to compound tax deferred. You'll most likely have access to more investment options, as well as the ability to adjust your investment strategy as you see fit. And, subject to IRS restrictions and penalties, you can take distributions when you like.
An IRA rollover can also help you consolidate your retirement assets. Over time, you'll have the ability to roll over your various tax-deferred accounts into the same IRA account. Using this approach, you can reduce paperwork and better manage your retirement assets.
If you roll over to an IRA, keep in mind these important rules. First, the money must go into a regular IRA. You can then convert the money to a Roth IRA at a later date, if allowed, to take advantage of a Roth's post-retirement benefits. Second, if you want to keep the option open to take your IRA rollover money and move it to a new employer's plan at a later date, be sure to keep the IRA separate from your other IRA accounts. If you don't, and you make future contributions to this IRA, you will not be able to roll it over to the new employer's plan.
The 2001 tax law permits rollovers from any IRA to qualified plans, but after-tax, non-deductible contributions may not be included in the rollover.
If you choose this option:
- Select a provider and complete an application
- Determine if the new provider will contact your previous employer to initiate the rollover
- Notify your previous employer that you'll be initiating a rollover
- Keep in mind that loans from your account are not permitted-if you choose to take an early distribution, you could be subject to a penalty
Keeping Your Savings in the Company Retirement Plan
If the plan allows, perhaps the easiest way to have your retirement money continue to grow tax-deferred is by simply leaving the assets in your previous employer's plan. There's typically little, if any, paperwork to complete and you'll avoid any early withdrawal penalties. In some cases, a minimum account value must be maintained, so check with the your previous firm's human resources representative to be sure that this is a viable option.
Another benefit of this approach is that your asset allocation strategy will remain intact, as your investments in the plan will not change. If the plan's provisions permit, you may also be eligible to take loans from the plan.
You should be aware that there could be several disadvantages to this option. For example, your former employer may charge an annual or monthly fee for allowing you to remain in the plan. The plan's provisions may limit your ability to take distributions, and certain features, such as loans, may not be allowed. Your investment options are also limited to what the plan offers at any given time. And there's always the possibility that the company could be acquired or radically change the plan in the future. These issues may not be of concern if you're planning to retire in the near future. However, if you're many years from retirement, you may be better served by rolling over your assets to another tax-deferred account like an IRA.
If you choose this option:
- Determine if the plan's investment and service options meet your needs
- Ask your previous employer if you are eligible to keep your assets in the plan
- Inquire whether the plan limits options for inactive or retired participants
- Determine if any paperwork needs to be completed
- Don't forget about outstanding loans—if you don't repay the balance, the IRS will deem the loan to be a distribution from your plan. If this occurs, you'll have to pay current federal, state, and local taxes and you could incur the 10% early withdrawal penalty.
Moving Your Savings Into Your New Employer's Retirement Plan
Another option is to roll over your assets from your previous plan into your new company's retirement plan. This alternative is contingent on the rules and regulations of the new plan. However, if allowed, there are a number of benefits in taking this approach.
If you roll over assets from a pension plan, your retirement assets continue to grow tax-deferred and you won't incur the 10% early withdrawal penalty. You'll also be consolidating your retirement assets, which can cut down on paperwork and help simplify your retirement investment strategy. Your new plan may also offer better investment options and provisions that weren't in your previous plan.
Even if your new plan allows rollovers, there are several issues to consider. There may be a waiting period before you can join your new company's plan or when the plan will accept rollover assets. In addition, your investment options may not be as attractive as your old plan and there could be higher fees associated with your new plan. Finally, remember that withdrawals and distributions are subject to the new plan's provisions. Rolling over assets to a new plan could also require a fair amount of paperwork. You may wish to consult with the respective human resources departments or your investment professional for assistance.
If you choose this option:
- Confirm with your new employer that their plan accepts rollovers
- To initiate a direct or indirect rollover, call your plan's toll-free number to start the distribution process
- Complete the necessary paperwork from your previous and current employer to process the transaction
- Confirm that distribution is made payable to the new employer's plan
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| Planning for Your IRA Rollover |
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If you've decided that an IRA rollover is the right choice for you, consider the following information to put your plan in place.
Investing Your IRA Rollover Assets
If you are looking to roll over money from an existing retirement plan, you'll need to reallocate your assets into a new group of investments. The decision you make today can affect your financial well being in the years to come. As a result, when it comes to these important decisions many people choose to work with their investment professional. An investment professional can be a valuable resource, as he or she can review your specific needs and develop a comprehensive strategy geared toward achieving your long-term goals. An investment professional can also monitor the performance of your retirement portfolio over time, and help you make periodic adjustments to your asset allocation strategy when appropriate.
If you're leaving your firm and have a large portion of your retirement plan assets in the company's stock, you have several options and opportunities. You may find it advantageous from a tax standpoint to withdraw your company stock shares, while rolling the rest of your non-stock assets into an IRA. For more complete details, you should speak with your tax advisor or investment professional.
Consider Your Time Horizon
The amount of time you have before you start accessing your retirement money is important. If you don't need to tap into your retirement nest egg for many years, you'll likely want to take a different approach to your investments than someone who will need his or her money sooner. This is because, historically, the longer you hold your investments, the lower the volatility, and the better the potential to realize positive results. Therefore, if you have a longer-term time horizon, you may be in a position to invest more aggressively as you may have the ability to ride out market volatility.
On the other hand, if your time horizon is just a few years, you may want to take a relatively more conservative approach.
Balancing Risk and Reward
When it comes to investing, there's no such thing as "no risk." Your individual threshold for investment risk—the amount of market fluctuations that you can accept—will play an important role in deciding how you should allocate your assets. While history doesn't always repeat itself, in general, the riskier an investment, the greater the potential for reward.
Don't Underestimate the Impact of Inflation
Your plan will also need to account for inflation because even a modest amount of inflation can substantially affect the amount of money you'll need to save for retirement. Your investment professional may recommend that you hold a portion of your assets in growth vehicles, even during your retirement years, so that you can potentially stay a step ahead of rising costs.
Diversify Your Assets
Knowing exactly where to invest your assets is no easy task. There are thousands of investments to choose from that invest in virtually every sector of the stock and bond markets. Allocating your assets based on performance alone is often ill-advised. That's because one year a particular asset class can be a star performer, only to severely under-perform the next year. As a result, it's often best to diversify your assets among a number of different asset classes. Please keep in mind that diversification cannot assure against market loss.
Avoid Market Timing
When you allocate your retirement assets, it may be tempting to periodically move your money into only those investments that have recently provided the strongest returns. Or you may choose to sit on the sidelines during periods of market volatility. Both of these strategies are known as market timing. While it may sound easy, historically the financial markets have never stood in place too long. And focusing on yesterday's winners or missing just a few days of strong market returns can dramatically impact your investment results.
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