|Overcoming rollover fears and anxieties
Dear Boomer Bucks,
In your article (on IRA rollovers), you stated
"In the event you inherited
money that's in a retirement plan, was the original owner (now deceased)
born before 1936? In this case, the beneficiary would be eligible
for special tax breaks."
Where would I find out what tax breaks I would be
entitled to? And how are they determined?
My CPA knows nothing about this tax break. Is it something
new? Thank you.
-- Brenda Jane K
Dear Brenda Jane,
No, actually, it's something quite old. Lump-sum distributions
of a qualified plan such as a 401(k) plan may be eligible for a
special 10-year averaging tax computation for persons born before
1936, according to Stephan R. Leimberg and John J. McFadden, authors
of "The Tools & Techniques of Employee Benefit and Retirement
CPA Ed Slott says this benefit passes on to beneficiaries
of plan participants who would have been eligible to get them had
they lived. This special provision does not apply to IRAs.
In their book, Leimberg and McFadden also state the
following: "It should be noted that for a participant who attained
age 50 before Jan. 1, 1986, not only the 10-year averaging calculation,
but also the other favorable lump-sum rules of earlier law were
Armed with this information, your accountant should
be able to figure out if the 10-year averaging calculation works
out better for you than the distribution schedule you would otherwise
I have a 401(k) that I would like to roll
over. I filled out the paperwork and had the plan trustee sign and
approve it. The reason for wanting to not participate in the plan
anymore is the fact that the company pulled out and will no longer
contribute. Since we are not benefiting through the employer we
would like to go with a financial institution we can be comfortable
The 401(k) company has stated
that it is illegal to do a rollover if you're still employed by
the company or if you're not 59½ years old.
How do we get our money away from this institution?
Ordinarily you can't roll money out of your company plan unless
there's a triggering event (such as the onset of a disability or
termination of employment). In some cases, if the plan permits,
employees can take what's known as an in-service, nonhardship withdrawal
distribution election. Sometimes the plan requires you to be 59½
to take this election.
Besides the fact that your company doesn't want to
contribute to the plan, is there anything else about the plan that
you dislike? If there are good investment options in the plan and
the fees are reasonable, there's no reason why you shouldn't continue
to make contributions to the plan. Your other tax-sheltered retirement
vehicle option is the IRA, and you're limited to an annual contribution
of $4,000 maximum this year ($5,000 if you're 50 or older), and
this is probably not enough to provide for adequate retirement security.
In a 401(k) you can sock away as much as $15,000 in 2006 ($20,000
if you're 50 or older).
Laws are in place to protect 401(k) plans, but unscrupulous
firms in rare instances have fraudulently helped themselves to their
employees' funds. Is that what you're worried about?
"Most companies these days use Fidelity or other
established companies to manage the 401(k)
plans," says financial planner Corcoran. "Jill may be
worried about the company mishandling the money and may need reassurance
about the protection of the money within the plan.
"The 401(k) assets
are in a trust and are not subject to creditors, and a third party
administrator handles the plan. ... I would only think about taking
the money out in full if she really feels like the money might disappear."
Longtime financial journalist Barbara Mlotek Whelehan
earned a certificate of specialization in financial planning.
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