Safe Retirement Income

Your Retirement Depends on It

Tim Barton, Chartered Financial Consultant

Pepin Wisconsin
715-220-4866

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Remember Retirement When You Change Jobs

 

WHEN YOU CHANGE JOBS

You May Have an Important Decision to Make…

What to do with your money in an employer-sponsored retirement plan, such as a 401(k) plan. Since these funds were originally intended to help provide financial security during retirement, you need to carefully evaluate which of the following options will best ensure that these assets remain available to contribute to a financially-secure retirement.

Take the Funds:

You can withdraw the funds in a lump sum and do what you please with them. This is, however, rarely a good idea unless you need the funds for an emergency. Consider:

  • A mandatory 20% federal income tax withholding will be subtracted from the lump sum you receive.
  • You may have to pay additional federal (and possibly state) income tax on the lump sum distribution, depending on your tax bracket (and the distribution may put you in a higher bracket).
  • Unless one of the exceptions is met, you may also have to pay a 10% premature distribution tax in addition to regular income tax.
  • The funds will no longer benefit from the tax-deferred growth of a qualified retirement plan.

Leave the Funds:

You can leave the funds in your previous employer’s retirement plan, where they will continue to grow on a tax-deferred basis. If you’re satisfied with the investment performance/options available, this may be a good alternative. Leaving the funds temporarily while you explore the various options open to you may also be a good alternative. (Note: If your vested balance in the retirement plan is $5,000 or less, you may be required to take a lump-sum distribution.)

Roll the Funds Over:

You can take the funds from the plan and roll them over, either to your new employer’s retirement plan (assuming the plan accepts rollovers) or to a traditional IRA, where you have more control over investment decisions. This approach offers the advantages of preserving the funds for use in retirement, while enabling them to continue to grow on a tax-deferred basis.

Why Taking a Lump-Sum Distribution May Be a Bad Idea:

While a lump-sum distribution can be tempting, it can also cost you thousands of dollars in taxes, penalties and lost growth opportunities…money that will not be available for future use in retirement.

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Benefits of Retirement Plan In-Service Withdrawal Make Sense for You?

You might know that you can move money from your employer’s qualified retirement plan to an IRA when you leave the employer.  But do you know you may be able to take advantage of this opportunity while still employed by the company?  There can be big benefits to this move.

What is an In-Service Withdrawal?

Basically, some companies allow active employees to move funds from an employer-sponsored qualified plan, such as a 401(k) or 403(b), while still contributing to the plan. When handled as a direct rollover, an actively working employee (usually age 59½ or older) then can buy an Individual Retirement Annuity (IRA) without current taxation. Of course, if a withdrawal is not rolled over to a qualified plan or IRA, it is considered taxable income (and may be subject to a 10% federal penalty if less than age 59½). But done right, there can be advantages to making this move.

What are the Benefits of an In-Service Withdrawal?

Using an in-service withdrawal to fund a deferred annuity in an IRA can offer these potential benefits:

  1. You may be able to gain more control over the retirement funds.
  2. You may be able to protect your retirement funds from market volatility.
  3. You may be able to choose options you feel better suit your retirement needs.
  4. You may be able to ensure yourself a guaranteed income stream in retirement.

What are the Next Steps?

  1. Talk to a Pro: Talk to your financial professional and see if taking an in-service withdrawal to fund an individual retirement annuity may benefit you.
  2. Talk to a Plan Administrator: Talk to your employer’s plan administrator about eligibility and requirements. They can tell you if the plan allows in-service withdrawals, and about any rules, such as withdrawal limits, fund types, transfer timing, etc.

Importance of Direct Rollover

As you consider an in-service withdrawal, it’s important to be certain your financial professional and plan administrator handle it properly — as a direct rollover.

With a direct rollover, your funds transfer from the plan trustee directly to another qualified retirement plan or IRA. By doing so they are not subject to tax withholding.

If your funds transfer to you, the plan participant, plan administrators must withhold 20% for federal income tax purposes, even if you intend to roll all the funds over within the 60-day time limit. This is a critical detail; one you don’t want to dismiss.

Added Considerations: Get the Complete Picture

  1. Talk with a tax advisor about potential tax implications before moving money out of your retirement plan.
  2. Use the proper paperwork. Most qualified plans have specific forms for direct rollovers.
  3. Some qualified plans may cease matching contributions for a period after taking an in-service withdrawal.
  4. The tax code allows the following to be rolled over from a qualified plan as an in-service withdrawal: Employer matching and profit-sharing contributions Employee after-tax contributions (non-Roth)
  5. Employee pre-tax and Roth contributions after age 59½
  6. The tax code does not allow rolling over the following before age 59½:
  7. Employer safe harbor match or safe harbor non-elective contributions
  8. Employee pre-tax or Roth contributions

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Retirement Plan Rollover Tips

Retirement plans come with a wide array of tax code abbreviations IRA, Roth IRA, SEP, 401(k), 403(b), HR10 just to name a few. There are times to consider doing a rollover of these funds.

When should you consider rolling over or transferring  your retirement plan?

  • Change of employment– Most retirement plans become what is known as orphaned when you leave the employer who sponsored the plan.  In order to maintain control of your money it is wise to rollover these plans into a personal retirement account.
  • Of course, when you are retiring – This is the time when you may want to start receiving income from your retirement plan.  Your plan may or may not have income options if it does shop these payments among private insurance companies.  This will insure you receive the highest income payments possible.
  • If you are receiving part of a spouse’s retirement plan due to a marital status change – It is a good idea to rollover the funds in order to maintain personal control.
  •  When your current retirement plan is terminating –  For a variety of reason employers will discontinue a plan and start another leaving the previous plan “frozen in place”.  A good time to do a rollover.
  • In-service distribution from your current plan when available can be rolled over into a personal retirement with guarantees in order prevent future losses.
  •  When you’re inheriting money as the beneficiary of a retirement plan account – Depending on your relationship with the deceased you may be able to do a spousal transfer without taxation into your own personal IRA.  Sorry kids you will have to pay income taxes.
  •  When you have worked for multiple employers, participated in multiple plans, and now desire to consolidate the assets from those different plans into a single plan.
  • If your retirement plan has no safe money investment options – it is advisable to diversify using a rollover whenever your plan allows.

A recent tax court ruled that only one IRA rollover is allowed per year.  To avoid tax problems it is better to do an institution to institution transfer.  This way the funds are never comingled with any of your other money.

Consult with a professional to help you make the most informed decision when a rollover is in your best interest.

You may ask questions in the comments or contact me privately Tim Barton, ChFC

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RMDs a Danger to Retirement Plans?

Government regulations dictate senior’s retirement income plans.  The question; Is this government “retirement plan” the best option?

If they have a traditional IRA, 401(k) and/or any other qualified retirement plan they must take Required Minimum Distributions (RMD) upon reaching age 70- 1/2.  If they do not take RMD as required the penalty is a harsh 50%.  Most seniors follow the RMD plan so it must be the optimal way to receive retirement income… Right?

The new reality is nothing could be further from the truth.  Expected longevity continues to increase well past the I.R.S. life tables used to calculate RMD withdrawals.  This could  set up a dangerous financial situation later in life.

The alternative solution and one most seniors have not considered  is a Life Income Annuity.  Rollovers from IRAs and 401(k)s are easy and there are no taxes due or 10% penalty even if income is started before age 59.

Advantages of Life Income Annuities are significant and perform better than RMD plans:

  1. After enduring a decade of sub economic performance, low interest rates,  disappearing pensions and a decreasing Social Security trust fund seniors need protection from steep market swings. Income annuities eliminate market risk by providing a steady monthly pay check.
  2. Saves the golden decade of retirement; the 10 years from age 70 – 80.  RMDs are scheduled to be lower during this time and increase later.  The lifetime annuity has on average a 60% higher payout  during the golden decade and guarantees these payments for life with any remaining principal paid to beneficiaries.
  3. Prevents the RMD crash.   A typical life income annuity starts payments at age 70 about 60% higher than RMD withdrawals.  It is true RMDs increase with age but assuming a 3% growth rate at their peak they  will provide an income 15% lower than the annuity.  After the RMD’s peak withdrawal years the  annual income begins decreasing until the money runs out.

Lifetime annuities take the RMD drop off  and longevity risk away while offering a higher payout.

For help you may ask questions in the comments

Or contact me privately: Tim Barton Chartered Financial Consultant

 

by Leave a Comment

When You Change Jobs…You May Have an Important Decision to Make!

What to do with your money in an employer-sponsored retirement plan, such as a 401(k) plan. Since these funds were originally intended to help provide financial security during retirement, you need to carefully evaluate which of the following options will best ensure that these assets remain available to contribute to a financially-secure retirement.

Take the Funds: You can withdraw the funds in a lump sum and do what you please with them. This is, however, rarely a good idea unless you need the funds for an emergency.

Consider:
•A mandatory 20% federal income tax withholding will be subtracted from the lump sum you receive.
•You may have to pay additional federal (and possibly state) income tax on the lump sum distribution, depending on your tax bracket (and the distribution may put you in a higher bracket).
•Unless one of the exceptions is met, you may also have to pay a 10% premature distribution tax in addition to regular income tax.
•The funds will no longer benefit from the tax-deferred growth of a qualified retirement plan.

Leave the Funds:

You can leave the funds in your previous employer’s retirement plan, where they will continue to grow on a tax-deferred basis. If you’re satisfied with the investment performance/options available, this may be a good alternative. Leaving the funds temporarily while you explore the various options open to you may also be a good alternative. (Note: If your vested balance in the retirement plan is $5,000 or less, you may be required to take a lump-sum distribution.)

Roll the Funds Over:

You can take the funds from the plan and roll them over, either to your new employer’s retirement plan (assuming the plan accepts rollovers) or to a traditional IRA, where you have more control over investment decisions. This approach offers the advantages of preserving the funds for use in retirement, while enabling them to continue to grow on a tax-deferred basis.

Why Taking a Lump-Sum Distribution May Be a Bad Idea:

While a lump-sum distribution can be tempting, it can also cost you thousands of dollars in taxes, penalties and lost growth opportunities…money that will not be available for future use in retirement.

For help you may ask questions in the comments or contact me privately here: Tim Barton Chartered Financial Consultant