Sit. Stay. Roll Over. That's a Good IRA

Physician's Money DigestAugust 2006
Volume 13
Issue 8

Is it possible to train your retirementplan? I think so. Maybeyou or your spouse are about tochange practices, companies, oreven careers. If change is in yourfuture, keep an eye on your retirementfunds during tumultuous times. Assetsfor your retirement should be able torespond to any possible changes withease, and all it takes is a little training.

If you are changing jobs and youhave an existing retirement plan, suchas a 401(k), you should already have aSummary Plan Description in your possession,which describes your retirementplan and the options available toyou. You should share this documentwith a financial professional so you candecide what option fits you best, becausemany employers have restrictionson what you can and cannot do withyour retirement fund. A little educationgoes a long way, and knowing thedetails of your plan will help make thetransition a bit smoother.

Generally, you'll have three majoroptions for your retirement fund whenchanging jobs. You can withdraw yourinvestment savings and keep the moneyas a lump sum (sit), you can leave themoney where it is (stay), or you can rollover your retirement savings into anotherretirement plan or an IRA. Eachoption has its pros and cons. Dependingon your situation in life and in yourcareer, you'll want to confer with afinancial consultant and choose theoption that makes you feel comfortable.

Retirement Commands

If you choose to withdraw yourmoney in a lump sum from a previousemployer's retirement fund, you mustpay taxes on the money you withdraw.Additionally, an employer is required totake a 20% withholding tax from yourlump sum. If you are under age 591/2,you may also pay a 10% penalty tax.You may roll over the lump sum andavoid the penalty, provided that youdeposit the funds in an IRA or anotheremployer plan within 60 days. You willhave to make up the additional 20%withheld by your employer, which willbe deducted from your reported incomewhen your taxes are due.

Rollover Restrictions

Leaving the money in your currentplan is one option when changing jobsor companies. However, you must alsobe aware of any possible regulationsand restrictions your former employerhas placed on your money in thatretirement plan.

If you choose to roll it over, youmay have the option of rolling yourassets into either an IRA or your newemployer's plan. However, to avoidpaying taxes and penalties, you shouldhave these assets transferred directly toanother IRA custodian. This rolloverwill still have to be reported to the IRS.One downside is that your retirementrollover cannot be rolled into a RothIRA. However, you may qualify for aRollover IRA, which can then berolled into a Roth IRA, but you mustmeet certain qualifications. Once aRollover has been put into a Roth, youcannot roll the Roth into anotheremployee-sponsored retirement plan.

There are exceptions to the rules ofrollovers for first-time homebuyers. Ifyou're emptying out your former retirementfund and wish to use up to $10,000toward the purchase of a first home,you're allowed to do so. You are taxedon the withdrawal, but you do not haveto pay the extra 10% early-withdrawalfee. You also have up to 120 days to usethe $10,000 on a first-time home purchaserather than the basic 60 days.

These are just the basic options youmay have when changing careers andretirement plans. Deciding how tohandle your retirement savings whenchanging jobs is crucial. Be preparedso you're ready when it's time to confrontchange.

Robert Valentine, CSA, of HuntingtonBeach, Calif, is with Financial and RetirementManagement, a registered investmentadvisory firm. He is a registered representativeof and offers securities throughSecurities America, Inc, and is a registered broker/dealer,member NASD/SIPC. He welcomes questions or commentsat 877-732-2637.

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