Overland Park, KS (Vocus) March 2, 2010
Many American workers are now facing opportunities to roll over their company pension plans. Layoffs, early buyouts, natural aging of the workforce and the desire to change jobs has led to increased rollover activity. Done correctly, rollovers are tax neutral; done incorrectly; rollovers can create significant tax liabilities. Now, what to do with your retirement plan or 401(k)?
Rolling over a company pension plan to an IRA is a simple procedure with fairly basic rules. First, you must be separated from service to qualify for a rollover. Second, if the funds are withdrawn from the company plan, they must be re-deposited into a qualifying IRA or another pension plan within 60 days of withdrawal or be subject to tax.
If you elect to touch the money in the process, you may “borrow” the use of the funds for 60 days one time each year. This rule applies to money invested in existing IRAs as well: 60 days one time each year. Like Cinderella, however, when the clock strikes 60, the IRS will turn your carriage to a pumpkin and slap you with a distribution tax if the money isn’t home.
The easiest way to roll over a pension / retirement plan is to execute a trustee to trustee (custodian) transfer. If you are married, company pension plans generally require the signature of your spouse, who will be giving up his/her right to an annuity interest, in order for you to move the money into your IRA.
Recent court cases underscore the necessity for both the owner of the account and the financial services representative to set up the account correctly. In one recent case (Anderson, et ux. v. Commissioner), the taxpayer took the suggestion of a bank representative to roll over his IRA to a higher paying account, but the taxpayer elected to maintain FDIC protection by opening two non-IRA CD accounts, one for his wife and one for himself. The transaction was ruled a taxable distribution by the courts, even though the taxpayer pleaded that the bank erred in advising him to execute it.
When planning for a rollover, there are several other rules to keep in mind. For example, if you are age 55 or older when the separation from service occurs, you may take your company pension as a lump sum distribution without paying the 10% early withdrawal excise tax. You will be taxed on the distribution as ordinary income. If you elect to roll the money into an IRA, this option is not available to you until you hit age 59 ½.
The Enron debacle pointed out the risks of holding company stock in a pension plan. You may want to give consideration to taking a lump sum distribution of company stock in your plan. You will pay tax on the cost basis of the stock at the time of distribution. When the stock is sold, you will pay capital gains tax on the increase in value over the cost basis. But only if you operate within current IRS rules for maximum tax planning benefits. Assets distributed from an employer’s qualified retirement plan are often transferred directly to a rollover IRA to avoid being currently taxed. However, if the distribution includes employer securities, such as employer stock, automatically moving the employer securities into a rollover IRA is not always the wise thing to do. If certain requirements are met, federal income tax law provides preferential treatment to such distributions of employer securities. If you have employer stock, you may not want to miss this specific tax benefit.
If you were born before 1939 and need to begin withdrawing money, the ten-year-averaging rule may be of benefit. At the time of distribution, you will pay tax on the entire amount, but at slightly lower rates than if you took a regular distribution. This taxable amount is not included in your Adjusted Gross Income for the year of distribution, effectively eliminating potential Alternative Minimum Tax problems or loss of deduction benefits created by a higher AGI.
With a little planning, a rollover can provide you and your heirs or beneficiaries a number of advantages over leaving money on deposit in a company pension / retirement plan. By following the rules, you can enjoy the benefits and sidestep the tax pitfalls.
We are rollover specialists offering complimentary qualified retirement plan analysis. If you would like assistance with your rollover or have questions, please contact Duane Roth at The Roth Companies at 800-551-7684 or check out http://www.therothcompanies.com or Duane(at)TheRothCompanies(dot)com.
Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC, Investment Advisor Representative, RDA Financial Network, a Registered Investment Advisor, Cambridge and The Roth Companies, Inc. are not affiliated.
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