October-November 2008 -- Whether you are a boomer saying goodbye to the daily grind or a Gen-Xer moving on to the next level of your career, retirement or a job change can create an ideal time to ask yourself what you want to do with your accumulated retirement funds. Unfortunately, there is no cookie-cutter answer to this question.
In pondering the next steps for your nest egg, you will need to assess the distribution options available to you and decide which ones will help you accomplish your goals. Here are just a few important reasons to consider an IRA rollover:
- You retain the tax-deferred status of your retirement investments.
- You have a broader array of investment choices in a self-directed IRA - and can craft a more appropriate portfolio to generate retirement income.
- You can structure a payout plan - at any age - that avoids the usual early-withdrawal penalty tax.
- An IRA rollover accommodates more customized beneficiary designations than most retirement plans.
Another important benefit of an IRA rollover is that it allows a surviving spouse to continue seamlessly with the IRA account - or consolidate it into his or her own IRA. Other beneficiaries, such as your children or grandchildren, also can receive payments from an inherited IRA over the course of their entire lives (this "stretch-IRA" strategy lets you take advantage of tax-deferred compounding while giving you the ability to spread the income-tax liability over many years). All IRA beneficiaries will be able to invest their self-directed IRA portfolios according to their individual needs.
The rollover reconsideredThere are some situations in which rolling over your nest egg to an IRA may not be a desirable course of action. Here are a few of those possible situations:
- You want to seamlessly continue the tax-deferred status of your retirement investments.
- If you retire between age 55 and 59½ and need income from this retirement account, you may want to leave some or all of it with your former employer in order to receive penalty-free distributions, where income taxes are due upon withdrawal.
- You were born before Jan. 1, 1936 and want to elect 10-year averaging tax treatment for your distribution from the employer plan. (Ten-year averaging, which is also available to the beneficiary of someone born before Jan.1, 1936, is not available if you roll over to an IRA.)
- You are able to transfer from one employer's plan to another.
- You prefer the investment choices offered by your former or new employer's 401(k).
- If your balance is less than $5,000, the rollover option may not be available to you.
Of course, a decision to not roll over your retirement nest egg to an IRA could impact your spouse, who down the road may have to deal with a former employer's plan representatives at a difficult time and make quick decisions - especially if immediate income is needed. Your spouse can roll over to an IRA in his or her own name, but if younger than age 59½, he or she will be at a disadvantage if income is needed. A spouse who inherits an established IRA can receive penalty-free withdrawals from that account at any age (taxes are due on withdrawals).
As for nonspouse beneficiaries, the Internal Revenue Service issued regulations in 2007 that allow them to request a rollover to a beneficiary IRA. Unfortunately, the regulations are not mandatory for plan sponsors, so there is no way of knowing if your plan will allow your children or grandchildren to take advantage of an IRA rollover and the "stretch-IRA" strategy. It is then possible that your retirement assets could be exposed to immediate taxation.
A comprehensive planning approach that factors in elements such as education funding you may be planning for your children or grandchildren can help you arrive at the best answer for how to manage your retirement account. And you don't have to go through this process alone - consider enlisting a financial professional to help you identify the possibilities, weigh the outcomes and make informed decisions that result in your wealth working hard for you.
Patti Lee Heidorn is a financial adviser with Smith Barney in West Palm Beach, Fla., and may be reached at 800-327-6322.
Smith Barney is a division and service mark of Citigroup Global Markets Inc. Member SIPC. Citigroup Inc., its affiliates and its employees are not in the business of providing tax or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Tax-related statements, if any, may have been written in connection with the "promotion or marketing" of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any interested taxpayer should seek advice, based on the taxpayer's particular circumstances, from an independent tax adviser.
