In most cases, it s beneficial to roll your 401(k) or 403(b) into an IRA. Almost 95% of funds in IRAs come from retirement plan rollovers.

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2 INVESTMENT ROLLOVER Transferring your money in your 401(k) or 403(b) to an IRA is often a wise financial decision but, like all other financial decisions, you need to know the facts. This guide will explain the advantages and disadvantages of moving funds from one to the other so you can decide if it is right for you. What Is A Rollover? A rollover helps you relocate the funds you saved while in an employersponsored 401(k) or 403(b) retirement plan. When you retire, your money in these plans can be rolled over into an Individual Retirement Plan (IRA). This is especially helpful if you have multiple employer-sponsored retirement accounts because it consolidates them into one easy to manage fund. From there, you can invest, track performance, and simply allocate funds. One account is preferable because you must start taking minimum required distributions on all of your 401(k) accounts when you reach age 70½. This is timeconsuming and confusing when you have many accounts. Rolling over money protects you from tax penalties as assets remain invested and tax-deferred. In most cases, it s beneficial to roll your 401(k) or 403(b) into an IRA. Almost 95% of funds in IRAs come from retirement plan rollovers. No Sweat Retirement Investment Rollover Guide 1

3 What s An IRA? An IRA is an account that shelters your retirement money to save on taxes. They are easy to open and you have many investment options to choose from such as stocks, mutual funds, bonds, index funds, and more. Why Use a Rollover and Not a Withdrawal? Two ways exist to move money from your 401(k) or a 403(b) to an IRA. Either you transfer your money directly from one company to another without touching it, or the company sends the money to you and you set up a new account. The first method is a direct rollover. Your money stays protected from taxes. However, if you withdraw the money from your 401(k) or 403(b) then it is considered income and you pay dearly. Not only will your plan withhold 20% to prepay tax, the IRS will also consider your withdrawal an early distribution. You must pay a 10% early withdrawal fee. If you withdraw $5,000 from your 401(k) at age 50 and you are in the 25 percent tax bracket, you will pay $1,750 in tax and penalty on the $5,000. You also pay state and local taxes. Don t withdraw transfer. Reasons to Consider a Rollover Many people move their money to an IRA because it offers substantial benefits. Investors have more control over their money, more flexibility, and get substantial tax benefits. More Investment Options A 401(k) or a 403(b) has very limited investment options. You may be able to choose between indexes, mutual funds or annuities and you might not like what your company offers. No Sweat Retirement Investment Rollover Guide 2

4 An IRA offers a wide array of low-cost investment options in every asset class including equities (stocks), fixed-income (bonds) and cash equivalents (money market instruments) such as gold, silver, and real estate. Lower Fees Most 401(k) and 403(b) plans include administrative fees while many IRAs do not. The company you worked for paid a brokerage firm 1% and 2% to manage their 401(k) and 403(b) investments. They charge you a maintenance fee to recoup these charges. When you rollover your money into an IRA you choose the investments yourself and you can choose ones with low fees. Many investments charge under 0.5%. Experts suggest you may improve your investment return by at least 1% because of this difference in fees. While this may not seem a substantial amount, you should remember that this is 1% compounded over your entire retirement. This can have a significant impact on how long your retirement funds last. If you pay $100 per year and compound that annually at 4% then you pay $219 over 20 years. If you pay $100 per year and your fee is only 1%, you only pay $122 over 20 years. Access to Funds You can take money out of an IRA whenever you want, but if you do so when you are under 59 ½ then you will be taxed. Nonetheless, it is there if you need it. Must You Rollover a 401(k) or 403(b)? You do not have to rollover your investments, and sometimes it may not be wise. You could go from a low-cost, diversified 401(k) or 403(b) to a high-fee IRA with little diversification. You want to keep as much of your money as possible, provide income, and beat inflation. No Sweat Retirement Investment Rollover Guide 3

5 If your employer allows you to keep your money in their plan, you will want to check its performance. You can check the ratings of your plan here. Keeping your money in an employer account poses challenges. You can no longer make contributions and you may also pay higher fees once you are no longer an employee. If the balance in any of your 401(k) accounts is under $1,000, an employer can cash it out and withhold the 20% tax, but they cannot do this on higher balances. Special considerations also exist when planning a rollover. Leaving a Job: Age 55 to 59½ When you leave your job early, but plan to retire at age 59½, you may want to postpone rolling over your 401(k) until that time. Persons 55 years of age or older separated from service are not subject to the usual 10% penalty levied when one takes distributions early. Perhaps you ve decided to stop working, you became ill, or you re taking time off for personal reasons before your retirement. When you separate from service you can withdraw from your account penalty-free until you re 59½, but you pay tax on your withdrawals. Roth Conversion If you choose to pay tax on some of your 401(k) or 403(b) contributions to take advantage of the tax-free benefits a Roth IRA offers, do not rollover a 401(k) or 403(b) in the same year. When you do a Roth conversion of nondeductible IRA contributions, the tax code combines the balances in all your IRAs and taxes them using this higher balance. Instead of paying tax on just the nondeductible amount, tax is pro-rated on the total of all accounts. No Sweat Retirement Investment Rollover Guide 4

6 Company Stock When you own company stock worth more than when you acquired it, you may want to speak to an accountant. Benefits exist for stockholders if they can use the net unrealized appreciation rules. Everything in your retirement fund, except the stock, moves into an IRA. The stock goes into a separate taxable account. The benefit of moving the stock into a separate account is tax savings. If you move the entire amount into an IRA, the original value of the stock is taxed as a distribution. You will be penalized 10% if you are under 59½ and you will also pay 20% federal tax and state tax too. You will also be taxed on the net unrealized appreciation, or the value increase in the stock, when you sell the stock. This is at the long-term capital gains rate of around 20%. If your stock is in a separate account, you can roll it into an IRA, and you will be taxed at your ordinary income bracket. This can amount to substantial savings. However, holding most of your investment in a single company stock is risky unless they are blue-chip. Types of IRAs Two types of IRAs exist; traditional and Roth. You can roll your 401(k) or 403(b) into either, but the way you are taxed differs. If you think your tax rate during retirement will be lower than it is today, use a traditional IRA. If you think your tax rate during retirement will be higher than it is today, use a Roth IRA. Older people tend to use a traditional IRA because it reduces their taxable income each year. Young people tend to use a Roth IRA because they usually have lower incomes. Roth IRAs are more flexible. You can withdraw any money you contributed to your plan at any time, but you cannot withdraw the interest until age 59 ½. If you No Sweat Retirement Investment Rollover Guide 5

7 take out more than you've contributed, you have to pay a penalty and taxes. Contributions to a Roth are never tax-deductible, but the earnings grow tax-free. Many people choose to convert their traditional IRA to a Roth because they can withdraw money tax-free once it is in the Roth. However, you must pay tax on your contributions and the interest earned in the 401(k) or 403(b), because the money was tax-exempt while in the plan. If you pay this tax from your 401(k) or 403(b) you will have less in your IRA for retirement. If you are in a low tax bracket, you might not have to pay a lot. However, those in higher tax brackets might consider moving multiple 401(k) or 403(b) plans over to a Roth gradually so they can compensate for the tax money they lose. Although you pay tax to get your money into a Roth, after the age of 59 ½ you can withdraw all of your money, including your investment gains and compounded interest, tax-free. Where to Rollover Four ways exist to roll your investments over into an IRA; discount brokerage, full-service brokerage, mutual fund company, or self-directed IRA. Many people are afraid to try investing themselves because they do not think they have the expertise. However, full-service brokerage firms and mutual fund companies often charge both front-end commissions and ongoing fees to do so. Statistics show that only 24% of professional investors beat the market over the past 10 years. That means 76% do not. Managing your own money with a discount broker may be a superior choice. E*Trade, TradeKing, TD Ameritrade, and Scottrade are some of the best known, but many others exist. Large index and exchange traded funds offer lower risk No Sweat Retirement Investment Rollover Guide 6

8 and fees, but you need to do your homework and monitor investments. Free information exists on the Internet if you want to educate yourself in how to set up a balanced portfolio with minimalized risk. You can also invest in real estate through a self-directed IRA if the company you choose permits it. If you purchase real estate through an IRA, you cannot actively manage the property. You must hire a building manager or company to perform maintenance and collect rents to enjoy the tax advantages of your IRA. Funds used to purchase the property must come from the account, and rental income and sale proceeds must return to the IRA. Self-directed IRAs may also allow you to invest in stocks, bonds, tax liens, notes, gold, limited partnerships, and other investment opportunities. Specialized custodians and trust banks administer these accounts rather than mainstream banks and brokerages, so do your due diligence. Investments held within selfdirected IRA are not guaranteed, but cash balances are held in insured financial institutions. Administrators handle the paperwork, but investing is up to you. Using a full service brokerage is a possibility, but you will pay a high front-end commission for your advisor and ongoing fees. The most familiar names in the IRA business are Fidelity, Vanguard, Merrill Lynch, and Wells Fargo. The same caution regarding fees applies to mutual funds. Mutual funds with low or no administrative fees are an option, but you will need to read the fine print to find them. Besides management fees and operating expenses (MER) charged on investments, you may also pay sales charge and trailing commissions. Sometimes a no load fund is a good choice because they don t charge a fee when you buy or sell units or shares, but they aren t always a better deal than a No Sweat Retirement Investment Rollover Guide 7

9 fund that does charge a fee. You need to look at each mutual funds performance and its MER before you decide to invest. Choosing an IRA When you are moving your life savings into an IRA you need to do your research. Consider your level of expertise and the level of risk you feel comfortable with. Self-investing is not for everyone because it takes time, patience, and diligence to get your investment mix right. If you want to use a discount brokerage, look for brokerages with low fees per trade and excellent customer service. Good brokerages offer a variety of investment products, various types of IRA accounts, deals when you rollover your money and access to quality support, research, and education. The last is very important as you need this data to make informed decisions. Tens of thousands of potential investments exist and if you do not have a financial background, it can be a daunting task. New investors sometimes incur many trading fees and may not get the returns they hoped for despite their best efforts. Investment professionals are available who can review your portfolio and give you financial advice. They are either a fee-only advisor or a commission based advisor like those found in full service brokerages. Fee-only financial planners are registered investment advisors with a fiduciary responsibility to act for you. They do not accept any fees or compensation based on product sales, so you do not need to worry about conflicts of interest. The National Association of Personal Financial Advisors (NAPFA) is the professional association of fee-only financial advisors. These advisors usually charge a percentage of assets under management, but they offer wealth management advice, not just investment choices. No Sweat Retirement Investment Rollover Guide 8

10 You may be able to hire a fee-only advisor by paying a flat retainer or an hourly rate for specific tasks. You can leave their service at any time if you re not happy with their advice and they do not charge fees to do so. Full service brokerages often charge steep fees when you close or transfer accounts. How to Rollover Your 401(k) or 403(b) Direct rollovers transfer funds from one institution to another. You set up your IRA, ask for rollover paperwork from your plan administrator, fill it out, return it, and wait for the funds transfer. If for some reason a check arrives in your mailbox, don t panic. You have 60 days to get it into your new IRA before you ll be hit with a hefty tax bill. Once the money is in your IRA, you can invest the money as you please. If you are still working, you can still make contributions of $5,500 per year, plus $1,000 catch-up if you are over 50, in both a Traditional IRA & Roth IRA. You can t contribute to a traditional IRA once you turn 70½, even when you earn income. If you have a traditional IRA you must take required minimum withdrawals by the following April 1 st after you turn 70½. If you have a Roth IRA, you do not have to take required minimum withdrawals because you have already paid the tax and gains are tax-free. No Sweat Retirement Investment Rollover Guide 9

11 ***** Choosing the right IRA is an important decision. By all means, talk to investment advisors and listen to what they have to offer. Spend time on websites and read what others have to say about the companies you consider. Often times the comments of current or past clients are enlightening. Whether you choose self-investing, investing with some professional advice or you want to leave your money completely in another s hands, it is a personal choice. However, you can shop around and find a fit at the lowest cost. The fees you pay leave less for you to enjoy, so your diligence is very worthwhile. It could affect your quality of life in retirement so don t rush into your decision. It pays to be thorough. No Sweat Retirement Investment Rollover Guide 10