So you’ve got a new job. Great! Now what do you do with that retirement savings account at the old joint?
Numerous choices abound. Unfortunately, the decision is not just where to place your investments with these plans, such as the corporate 401(k). How you choose to transfer your old money will affect both current and future tax bills, plus your ability to manage cash flow during retirement. And remember, accessing that retirement money now means an almost immediate tax bill.
Using retirement plan money the wrong way “can cost you 50 percent. It can be really painful,” says Irvine, Calif., financial planner Larry Beltramo.
That’s incentive, so pay attention.
The obvious first choice is to leave it at the old place. If you’re happy with the old plan, and they’ll let you keep your money there, there’s nothing wrong with status quo. This is the easy option, with no immediate financial jolt. In some cases, keeping your money in the old plan may be pragmatic. For example, most loans against retirement savings come due when a plan account is closed or transferred.
But if the old plan’s not working for you, there are several options.
First, check whether your new boss has a plan that accepts rollovers from other retirement accounts. You’ll also have to find out if the two plans–old and new–are compatible according to tax laws. (Most 401(k)’s, for example, can be rolled into new 401(k)’s. But many 457 plans at not-for-profit organizations cannot be rolled into 401(k)’s, and vice versa.)
Moving money into your new employer’s plan makes for tidy personal bookkeeping and can give you access to that money if the new plan offers loans against savings. Again, this is a relatively easy option that incurs no immediate tax challenges. Remember, though, that many plans have limited investment choices, and 401(k) loans are not always the best deal for your present or future finances.
If you want to move money out of any employer’s plan, you can easily roll over the old retirement plan money to a self-directed individual retirement account. If done correctly, no immediate tax liability is created, and, says Beltramo. “You’ve got total control.”
You can also contact the administrator of the retirement plan, the entity that operates the plan for the employer. The administrator might be willing to roll the existing money into a new plan, one that is also under the administrator’s financial umbrella.
But don’t settle for such a deal without doing some comparison shopping. Many retirement plans are administered by insurance companies that often have pricey deals for traditional IRAs, and sometimes they’ll wrap your retirement savings in variable annuities that include unneeded insurance costs.
Don’t forget that you have the right to transfer that money to any approved IRA custodian, and with these self-directed plans you can choose to own mutual funds or individual stocks and bonds of your own selection if you are so inclined.
Now I bet you’re wondering, what about those new Roth IRAs? Well, first, please note that you cannot directly transfer retirement plan savings to a Roth IRA. You must first roll the money to a traditional IRA, then convert that IRA to a Roth IRA. Confusing? A bit.
Next, be aware of what a Roth IRA conversion means.
Yes, Roths have some long-term tax savings and liquidity benefits. Yes, distributions from a Roth IRA can be tax-free and aren’t mandated at age 70 1/2.
But think of the upfront costs. Starting in 1999, you must pay income tax on the full amount of all Roth conversions in that current tax year. So say you’re in the 31 percent federal tax bracket. For every $1,000 you convert to a Roth IRA, Uncle Sam will likely want $310 of income tax come April 2000 (and that doesn’t count state tax). Ouch!
Now if your old retirement plan includes company stock, there’s an interesting twist, says Steve Banks of T. Rowe Price mutual funds. A quirk in tax laws, and falling capital-gains rates, might make it profitable for a worker switching jobs to transfer the stock out of a retirement plan and into a basic taxable account.
If these shares have appreciated greatly, you might benefit because you only have to pay income taxes immediately on your cost basis of the stock (plus a 10 percent penalty if you’re under 59 1/2.) For example, say you’ve spent $4,000 for shares in your old retirement plan, now worth $10,000. Your immediate tax bill for such a switch would only be on the $4,000 you invested.
When you eventually liquidate those shares, the tax benefit kicks in. Those shares should qualify for long-term capital-gains treatment, which would mean a rate of 20 percent if you’re in the 31 percent bracket. For savers with a long-term perspective and the ability to pay an upfront tax bill, that can be a healthy savings.
Perhaps your head’s pounding right now. A new job is enough pressure without pondering weighty financial issues.
“These are not easy decisions,” Banks admits.
Many financial services companies offer useful guides for people who are either getting a lump-sum distribution from their employer or pondering a transfer of retirement plan money.
If you don’t have time now to make a decision, in many cases you can put off any decision. Keeping money in an old plan doesn’t preclude a transfer later. And not converting to a Roth IRA in 1999 does not preclude such a switch at another time.
These are decisions that take homework and careful thought. You’re better off stalling and making the right call rather than rushing, or being rushed, into a hasty call.
MORE HELP FOR THOSE CHANGING JOBS
Today’s tip: Changing jobs? What should you do with the money in your company retirement plan?
The Vanguard group of mutual funds, of Valley Forge, Pa., has published a booklet, “Changing Jobs.” The 16-page report spells out your options, the consequences of each, and which choice may be best for you. There’s also a quiz to use to help choose an investment strategy that’s best for you.
For a free copy, call 800-642-1196 from 7 a.m. to 8 p.m. Mondays through Fridays or 8 a.m. to 3 p.m. Saturdays, Central time. Your request won’t result in any follow-up mailings or phone calls, said Vanguard spokesman John E. Demming.
– Knight-Ridder/Tribune
