Consider a Rollover IRA's Ins and Outs Retirement Planning

Physician's Money Digest, April15 2004, Volume 11, Issue 7

Employer-sponsored retirementplans are sometimes the most significantsource of income forretirees. If you're a physician-investorwho currently has multiple retirementaccounts, consider a rollover IRA. Besidesconsolidating your retirement accounts,a rollover IRA will streamline portfolioplanning and simplify account managementand distribution decisions. Considerthe following additional benefits arollover IRA offers:

Flexibility. Unlike employer-sponsoredretirement accounts, rollover IRAsallow the owner to make key decisionsthat affect account management andadministrative costs, investment direction,and asset allocation. Investment choice. An IRA providesthe broadest range of investmentchoices. Owners can develop the precisemix of investments that best reflectstheir risk tolerance, investment philosophy,and financial goals. Estate planning features. IRAassets can generally be divided amongmultiple beneficiaries. Each beneficiarycan use planning structures, such as thestretch IRA, to extend the benefits oftax-deferred investment compoundingover the course of their life. In contrast,distributions from employer-sponsoredplans must be taken in lump sums ascash payments only.

Rollover Possibilities

Investors have two options: a direct orindirect rollover. With a direct rollover, acheck is made out to the company thatwill administer the new IRA. This directtransfer of funds lets you avoid IRS withholdings,current taxes, and early withdrawalpenalties (withdrawals prior toage 59 1/2 may be subject to a 10% penaltytax). A direct rollover offers the potentialfor tax-deferred growth on the entireamount of the rollover. Taxes aren't dueuntil the assets are withdrawn; withdrawalsare taxed at then-current rates.

With an indirect rollover, a check ismade out to you instead of the new IRAcustodian. Your employer is required towithhold 20% to meet your potentialincome tax obligation. If you completethe rollover within 60 days, you canreceive the 20% back. You must, however,deposit the full amount of the distributionin your new IRA, making up thewithheld 20%. Rollover note: The 20%withholding is not your final tax liability.

If you spend the distribution ratherthan reinvest it in another tax-qualifiedretirement account, you will have todeclare the entire distribution as incomeand pay the full tax at filing time—payingat a rate of up to 35%, depending onyour eventual tax bracket. In addition,the IRS generally imposes a 10% penaltytax on withdrawals taken before age 55from an employer-sponsored plan and beforeage 59 1/2 from an IRA.

Realistic Expectations

While there are many advantages to arollover IRA, there are also potentialdrawbacks. For example, assets in an IRAmay be used to satisfy debts in certainpersonal bankruptcy cases in manystates. Also, you must begin taking distributionsfrom your IRA by April 1 of theyear you turn age 70 1/2, whether or notyou are still working. Employer-sponsoredplans do not require distributionsif you continue working past age 70 1/2.

Scott J. Kleiman is the presidentof Apollonia Financial Services inElkins Park, Pa. All securitiesoffered through Linsco/PrivateLedger, member SIPC. Past performanceis no guarantee of futureresults. The information presented is the opinionof Mr. Kleiman and not that of Linsco/PrivateLedger. He welcomes questions or comments fromreaders at 800-242-1760.