Changing Jobs? Approaching Retirement?

What should you do with the money in your employer's retirement savings plan? If your account balance exceeds $5,000, you may elect to leave the money in your previous employer's plan. If you'd rather take the cash there are significant advantages to reinvesting rather than taking a cash payout.

The Three Don'ts

1. Don't wait more than 60 days: The IRS can transform your hard-earned money into a shadow of its former self if you're slow to reinvest your distribution into either a rollover investment vehicle or a new retirement plan. Under current tax law, retirement plan distributions must be reinvested within 60 calendar days of the date issued or the money becomes ordinary taxable income and subject to the 10% early-withdrawal penalty if you're younger than 59-1/2. If you're late, you'll owe taxes on the full amount you receive, plus penalties.

2. Don't mix pre- and after-tax money: Your employer's plan may allow you to make both pre- and after-tax contributions to your account. However, you may not be able to roll over after-tax contributions to a new employer's plan. For tax purposes, the government needs to track the money you've paid taxes on and the money you haven't. You don't want to pay tax twice! If you have questions about what you can and cannot roll over, see your tax advisor.

3. Don't have the check made out to you: If your distribution check is made out to you personally, instead of the new plan administrator or IRA trustee, the Federal Government requires 20% be withheld. And, if you don't re-contribute the full amount of the original distribution within 60 days, you might be subject to the 10% "early withdrawal" penalty on all or part of the distribution.

Your Reinvestment Options
 It's important to understand the alternatives available to you for reinvesting your money so it continues to work for you. There are three ways to reinvest:

A Rollover IRA
Rollover IRAs are for people receiving a distribution from an employer's qualified retirement savings plan and for those who don't want to re-invest in a new employer's plan. They are offered by many financial institutions, with a broad selection of investment options. Rollover IRAs allow you to avoid the mandatory 20% federal income tax withholding and the 10% penalty for early withdrawal if you are under age 59½. The money continues to compound tax-deferred until you start taking money out for living expenses during retirement. Be sure to request a trustee-to-trustee transfer or direct rollover. You cannot rollover a distribution from a qualified retirement savings plan directly into a Roth IRA. A traditional IRA must be established to receive the distribution and then converted to a Roth IRA.

Rollover Annuity
Annuities are contracts, generally offered by insurance companies, that pay a monthly, quarterly, semiannual or annual income benefit for the life of the recipient(s) or for a specified period of time. Annuities are designed to be a regular source of income for life. There are two types of annuities:

  • A fixed annuity guarantees principal and pays a fixed rate.

  • A variable annuity allows investment in securities offering variable rates of return.

Both types can be set up as either "deferred" or "immediate" annuities. The type you choose depends on whether you want to defer taking money out until you need it, or whether you're ready to begin receiving retirement payments immediately. Like a rollover IRA, a rollover annuity allows you to continue enjoying tax-deferred earnings until you withdraw your money. Rollover annuities may also offer additional features and benefits for which the issuing company charges additional fees.

Your New Employer's Retirement Plan
If you're starting a new job, your new employer may offer a tax-deferred retirement plan. Usually, you can move pre-tax contributions and earnings from your existing retirement plan directly into a new plan. Talk to the plan administrator at your new company first. Rules and investment options vary among retirement plans, and not all plans accept rollovers. One additional option to consider: if your account balance exceeds $5,000, you may elect to leave the money in your previous employer's plan.

Copyright © Frank Russell Company 1998 - 2003. All rights reserved. Important Legal Information. Important Legal Information. Revised 6/21/02

This is a publication of Frank Russell Company. It should not be construed as investment, legal, or tax advice. The contents are intended for general information purposes only, and you are urged to consult your own investment, legal, or tax advisor concerning your own situation and any specific investment questions you may have. For further information about these contents, please contact Frank Russell Company. Frank Russell Company, a Washington, USA, corporation, operates through subsidiaries worldwide.