Take Charge of Your Retirement Rollover

Physician's Money Digest, August31 2004, Volume 11, Issue 16

Change is commonplace in thevolatile American economy.When a major life changerequires you to rethink yourretirement plans, you need to considernumerous factors, including portfoliodistribution methods, tax options, androllover strategies. Will you make theright decision?

Whether you're changing jobs,funding your child's education, or retiringearly, you have some decisions tomake that may directly affect yourretirement lifestyle. The complex choicesmay require the advice of a financialadvisor, but you can start by thinkingabout what method of retirement managementis best for your needs. The followingare three primary options formanaging your retirement:

Annuity Payment

If you decide to take your retirementsavings as an annuity, you will receive aseries of payments based on your lifeexpectancy. Hopefully, you'll outliveyour expectancy, and in this case, youwill continue to receive the payments.

There are two types of annuities.Single-life annuities provide a monthlypayment over your lifetime. Joint-and-survivorannuities provide for yourspouse and dependents after yourdeath, although the payments in thisoption are typically 30% less than thesingle-life annuity's because they covera longer period of time. For example,instead of receiving $1000 a month for20 years, you would receive $700 amonth for 30 years.

Another annuity strategy is pensionmaximization. In this case, you choosea single-life annuity option and use theextra income to purchase a life insurancepolicy. When you die, the lifeinsurance replaces the annuity paymentfor your survivors.

Lump-sum Payment

Taking your retirement payment inone lump sum has its pluses and minuses.If you take the lump sum directly,you will have 20% of the distributionwithheld for federal income tax. Ifyou're under age 59 1/2, you'll be subjectto an additional 10% early withdrawalpenalty. However, death, disability, separationfrom service, and some medicalexpenses are a few exceptions to theearly withdrawal penalty.


The lump-sum paymentoffers freedom of investment. Instead ofconforming to your employer's retirementplan, you are free to invest the moneyhowever you like. You can work with thefinancial institution of your choice anddevelop a personalized plan that best fitsyour needs. As your needs change, youcan reinvest the money accordinglybecause you aren't locked into anything.

Before deciding on an investment levelfor your lump sum, plan a strategy. First,assess your level of risk. You wouldn'twant to get involved in an investment thatcould wipe out your savings if it failed.Next, determine your objectives and allocateyour assets in a properly diversifiedportfolio designed to meet your needs.The five different levels of objectives thatinvestors should consider are defensive,moderate income, balanced growth andincome, growth, and aggressive growth.Your objectives and needs will varydepending on your age, risk tolerance,and investment time horizon. You willneed to review your portfolio from time totime as your objectives change or yourinvestments perform differently.

Consider your tax options. You mayadd the sum to your regular earnedincome for the year and pay your taxesaccordingly, but this method results in thehighest amount of taxes payable on yourdistribution. Usually, you save somemoney if you participate in a 5- or 10-year averaging program.

A 5-year averaging program allowsyou to treat the distribution as if you'vereceived payments over 5 years. Simplytake the whole amount and divide it by 5.You qualify for this method if you haveparticipated in the employer's retirementprogram for at least 5 years, received aqualifying distribution, and received atotal distribution.

Ten-year averaging works the same as5-year averaging, except you divide theamount by 10, calculate the taxes, andthen multiply the tax amount by 10. Toqualify for this method, you must havebeen born before 1936, participated inthe retirement program for at least 5years, received a qualifying distribution,and received a total distribution.

IRA Rollover

After leaving your job, the most effectivemethod of managing your retirementfund is to roll it directly into an IRA,which allows you to take your lump sumwithout paying current taxes and whilemaintaining the tax-deferred growth. Ifyou're over age 59 1/2, you can avoid themandatory 20% income tax withholdingby rolling the funds into an IRA and thentaking the money out. IRAs also offersome flexibility. You control your retirementfunds among many options (eg,CDs, stocks, bonds, mutual funds, andannuities). To do this, arrange to have themoney transferred from the trustee of theretirement plan to the custodian of theIRA. When done correctly, you can avoidwithholding and current income taxes.

If you decide to rollover your savingsinto an IRA and take some moneyout, you may be able to avoid the 10%early withdrawal penalty, making anIRA a good option for investors whosechildren will attend college or who maywant to retire early.

Substantially equal payments fromyour IRA are not subject to the 10%penalty if they are payable for 5 yearsor until you turn age 59 1/2, whichever islonger. For example, if you decide totake a withdrawal at age 50, you can doso penalty-free as long as you receivepayments over a period of 9 1/2 years.These payments would be based onyour life expectancy at age 50.Similarly, if you tap your IRA at age 58,you may do so without penalty as longas you receive payments over a periodof 5 years, even though you will turnage 59 1/2 before that time.

Don't get caught in a retirementinvestment decision that doesn't producethe results you want. Your best managementplan will depend on your personalneeds and desired retirement lifestyle.Your financial advisor can help youassess your goals and develop a plan thatis right for you. Financial advisors donot offer legal or tax advice, so consultwith your chosen legal or tax advisorbefore making any investment decisions.Keep these retirement managementoptions in mind as you face your lifechange and redevelop your strategy.

Doug Charney is vice president ofinvestments with Wachovia Securitiesin Harrisburg, Pa. He welcomesquestions or comments at 888-529-2973 or dcharney@wachoviasec.com, or visit www.charney.wbsec.com. Wachovia Securities, LLC, member New YorkStock Exchange and Securities Investor ProtectionCorporation, did not assist in the preparation of thisarticle. The article's accuracy and completeness arenot guaranteed. The opinions expressed are those ofthe author and not necessarily those of WachoviaSecurities or its affiliates.