Rollovers & IRAs

Rollovers

A qualified company plan is a plan established by employers and allows for eligible employees to make tax deferred contributions. Granted a few requirements are met, money invested into a qualified plan does not need be reported as earned income in the year it was earned and may help lower your overall tax liability.

If you have worked for a large company you are more than likely familiar with a 401(k) plan, and they are part of a family of retirement plans known as defined contribution plans. A few other types of defined contribution plans include 403(b)’s and SEPs. A defined contribution plan has a “defined” contribution amount that is made by the employer, employee or both.

Many defined contribution plans, including a traditional 401(k) and SEPs are considered “qualified”. Qualified brings with it a few distinguishing characteristics:

• Tax deductable
  
  
• Tax deferred
  
  
• Restrictions on contribution limits
  
  
• Withdrawals prior to age 59½ may be subject to a 10% federal tax penalty
  
  
• If no longer working, minimum distributions are required starting at age 70½
  
  

Employers establish defined contribution plans for a host of reasons as they can be used as a powerful financial tool for their employees in retirement. For both employees and employers, there are many benefits:

• Help attract and keep talented employees
  
  
• Allow employees to decide how much to contribute to their accounts within IRS guidelines
  
  
• Employers may be entitled to a tax deduction for their contributions to employees’ accounts.
  
  

Many defined benefit plans allow participants to take their benefits with them when they leave the company, potentially easing administrative burdens.

WHAT ARE MY OPTIONS AND WHY SHOULD I DO A ROLLOVER?

When transitioning jobs you have many choices, and what to do with your old company plan is just one of them. Properly managing this transition can be critical to the success of your retirement. Researching options may prove to be worthwhile time spent.

Cash out the plan. By cashing out the plan, there are a few issues that you may encounter that you want to be aware of. Assuming the company plan is traditional, and not a Roth option, ordinary income taxes will become due. In addition, if you are under 59½ there may be a 10% federal tax penalty on the amount liquidated. There are exceptions to the rule, but they often involve severe hardship needs. Not only may taxes take a generous portion of the account value, distributions may reduce the value of those investment dollars. Remember, someday you may decide to retire. A supplement to social security may be an important resource you’ll be thankful you didn’t liquidate years earlier.

Leave the assets in the current plan. Many 401(k) administrators charge a fee for leaving your account within the plan. In addition, the old employer is charged for your plan since it is still left with them. Not to mention the continued liability the company assumes with an ex employees money, it may be in your best interest to have the money moved. There may also be liquidity issues if the company decides to merge, sell, or goes out of business.

Roll it into the new company plan. This option may be a good choice if it isn’t too late and the new company will accept those assets into their plan. This option is often the simplest but also should be carefully evaluated. By rolling it into the new company’s plan, you will incur the fees associated with that new plan which may be more or less than your former plan. In addition, there may be more or less of an opportunity to diversify through investments outside of your current plan.

Roll it into an Individual Retirement Account (IRA). An IRA by definition is also qualified which will allow for an old company plan to be rolled into it without the tax penalties associated with cashing it out. Unlike the option of rolling it into the new company’s plan, by placing it into an IRA, you have total control over the options it gets placed into. This option also allows for greater control as you can also control the level of fees you wish to pay which may not have been an option with your former or current company plan.

For all the reasons to cash it out, such as, “I need it to help me transition” or, “I really want that new car”, there are many reasons you may want to consider rolling it over. If you have either left the company or been laid off there are options other than cashing it out for you to consider.

There are 2 primary reasons why you may not want to cash it out (assuming you are contributing to a traditional 401(k) and not the Roth option):

• Since taxes have not yet been paid, ordinary incomes taxes may be due on the entire account balance
  
  
• If you are under 59½ a 10% federal tax penalty may apply
  
  

There are a few exceptions to the 10% federal tax penalty but usually require a severe hardship need to be waived. Depending on your ordinary tax rates, half of your money could be taken for tax and penalties. Now that you understand what not to do, let’s discuss why you may want to do a rollover.

A vast array of investment choices:

• Possible lower fees and expenses than what you had been paying in the plan
  
  
• Greater control over options as you have the choice to invest conservative, aggressive or a combination
  
  
• Allow for continued tax deferred growth
  
  

Since there are many options to consider, contact the staff at Valley Financial Corporation to answer any more of those questions. Our trained and professional staff of Advisors will work with you to help ensure your goals and objectives are being met at every bend in the road.

IRA

For many investors, an Individual Retirement Account (IRA) is an important way to help prepare for retirement and provide for future generations. It’s an account designed to help build that all-important nest egg.

Traditional IRA - Traditional IRAs may be suitable for investors who meet the criteria for a current tax deduction or who don’t qualify for a Roth IRA. Taxes are deferred until distributions are made at retirement. Distributions are then taxable as ordinary income. Any withdrawals prior to age 59½ may be subject to a 10% federal tax penalty. Contributions may be tax deductible depending on income limits.

Roth IRA - Roth IRAs may be appropriate for investors who have a long time horizon or are not eligible to take a deduction for traditional IRA contributions. Earning grow tax-deferred. Contributions are made with after tax money. Qualified distributions are tax-free upon retirement when an account has been open for at least five years and/or certain requirements have been met. Non-qualified distributions of earnings are taxed as ordinary income and prior to age 59½ may be subject to a 10% federal tax penalty. Eligibility to participate depends on adjustable gross income amounts.

It’s important to remember that the type of IRA you choose may be contingent upon several factors, such as your modified adjusted gross income, age, marital and employment status, and plan coverage. These are just some of the reasons why it’s prudent to seek professional advice when selecting or making changes to an IRA.