Mr. Money - Know' s By: Dana Goldfarb Financial Writer dana@biznetonline.com

TO ROLL or NOT TO ROLL YOUR RETIREMENT ACCOUNT, THAT IS THE QUESTION

Have you changed jobs lately, or are you thinking of changing jobs soon? If you answered 'yes' to either, here's something you are going to have to consider: what to do with the lump-sum distribution of your retirement plan. You may suddenly find yourself in possession of the largest, and most important, chunk of money you have ever seen. Pretty neat, but pretty scary. Because this money will probably play a large part in securing your retirement years, it's important that you understand your options. So, let's take a look at some.

Q: What if I'm leaving my job and am offered a lump-sum distribution?

A: The best thing to do might be to do nothing. In most cases, your ex-employer will not force you to take your money out right away. This will give you the time you need to research your alternatives. If you've been participating in the company's 401(k) plan, you may be able to keep your money in that plan and also put any lump-sum payments from a defined benefit plan (if your old company has one) into the 401(k) by way of a rollover. Another option, and possibly the most sensible option, is to roll over your money into your new employer's retirement plan. Yet another option is to rollover the lump-sum into an Individual Retirement Account (IRA), a rollover IRA, to be exact.

Q: What is a rollover?

A: A rollover is a transfer of money from one employer's qualified retirement plan to another employer's plan, from an employer's plan to an IRA, or from one IRA to another IRA. This is the IRS's way of saying "we'll let you transfer your retirement money from one retirement account to another without punishing you with an obscene tax bill."

Q: How do I roll over the money into an IRA?

A: The first thing to remember is that you can get yourself into trouble if you do it incorrectly. So, I strongly urge you to let a financial advisor help you through the process. In most cases, though, a rollover is done sponsor-to-sponsor. For example, if the current sponsor of your plan is ,say, Fidelity, and the sponsor of the new plan is, say, Mass Financial, then it is smartest to let Mass Financial roll it over for you. That way, you don't have to touch the money. The next smartest way to do it is to have the current sponsor make a check out in the new sponsor's name, for your benefit. Do not let them make the check out in your name. If you do let then, you’ll receive that obscene tax bill from the IRS I was talking about. Also, remember not to transfer the money into your existing IRA; transfer it into a new rollover IRA. This will make your record keeping simpler and will also make it much easier to roll the money into a new employer's 401(k) program, if you choose to do so, sometime in the future.

Q: Can I take the money out of an IRA before I'm 59 1/2?

A: There are any number of reasons why you may need to tap into your IRA account prior to your turning 59 1/2. Maybe you want to retire early, or you need the money to pay bills while you're between jobs. Whatever the reason is, the answer is 'yes'. The most obvious way is to take a premature distribution. You'll pay taxes on the money you withdraw plus you'll incur an additional 10% penalty. The not-so-obvious way is to elect to receive regular payments under Internal Revenue Code Section 72(t). Under Section 72(t), your payments will not be subject to a 10% early withdrawal penalty as long as you take your money out in equal payments based on life expectancy tables. There are several methods of calculating the level of payments to meet a variety of needs. However, penalty taxes will apply if you change the amount or stop payments before the greater of five years or before you turn age 59 1/2. In other words, you must continue the payments for the longer of the two periods.

Q: How much will I save by rolling the money over versus taking it now?

A: Let's take a look. The chart below is courtesy of MFS Mutual Funds, and is a hypothetical example of a 35 year old, in a 28% tax bracket, whose investment is earning a fixed return of 8%.

Quite a difference, isn't it? Remember, by withdrawing money prematurely, you could be opening yourself up to a tax liability. And besides, why reduce the amount of money that can stay at work for you if you don't have to? But before you make your decision, don't forget to consult your financial advisor.

I wish you every success.

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Dana Goldfarb is a broker for Sutro & Company In Woodland Hills Ca.
And Can Be Reached At (818) 313-8700

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