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After retirement, money can be rolled over to IRA, kept in plan or, worst option for tax hit, withdrawn
Published on Sunday, Feb 10, 2008
A wife raises a multitude of questions about 401(k) rollovers.
Q: My husband and I will retire next year. He'll have a high six-figure balance in his 401(k) plan.
What do we do with this money? My husband claims he can just roll it over into an IRA. How does that work? Do we use our bank, go through a financial planner or something else? How is our money distributed to us? For our two children to inherit this money, do we need to see a lawyer to open a trust, or just leave it to them in our wills? Or would a financial planner also handle those details?
A: Rolling over your husband's 401(k) account balance into an IRA makes sense because it would allow the money to continue to grow tax-deferred until withdrawn.
Another option, depending on what his employer plan allows, is to keep the money in the 401(k) after he retires. A rollover IRA, however, usually provides more investment choices. Simply withdrawing all the money from the 401(k) is the worst choice because all of it becomes taxable at once, creating a painful and unnecessary tax hit.
You don't need a financial adviser to do a 401(k) rollover. The place where you set up the rollover IRA — a bank, mutual-fund company, brokerage firm or other financial institution — will gladly handle the paperwork. Transferring the money from the 401(k) to the new rollover IRA usually takes no more than four weeks.
But rolling the money over into an IRA is only the first step. Based on your questions and the size of your husband's balance, you may benefit from professional advice.
You need to decide how to invest the money and, at some point, how much to start withdrawing for living expenses and/or to satisfy legal minimum distribution requirements. An IRA or individual retirement account is simply a type of tax-deferred account. Within an IRA, depending where you set one up, you can have many investment choices, including stocks, bonds, mutual funds, exchange-traded funds and certificates of deposit.
The Web sites of the three major no-load mutual funds firms: Fidelity (http://www.fidelity.com), Vanguard (http://www.vanguard.com) and T. Rowe Price (http://www.troweprice.com) offer extensive educational materials on 401(k) rollovers you can refer to even if you never become a client. One important point: To avoid potential tax headaches, make sure your old employer transfers the 401(k) money directly to your new IRA custodian, not to you.
All three fund firms (and many others) also offer general investment guidance at no cost. Based on your husband's anticipated 401(k) balance, he would qualify for a free personalized financial plan from certified financial planners at Vanguard and T. Rowe Price if he invested the money in their funds.
To search for planners not affiliated with these funds, you can check Web sites such as the Certified Financial Planner Board of Standards at http://www.cfp.net, the National Association of Personal Financial Advisors (fee-only, no-commission-on-products advisers) at http://www.napfa.org and the Financial Planning Association at http://www.fpanet.org. For financial planners who charge hourly fees for as-needed services, check the Garrett Financial Network Web site, http://www.garrettplanningnetwork.com.
At the time your husband sets up a rollover IRA, he can name you as the primary beneficiary and your children as contingent beneficiaries (so they inherit the IRA if you pre-decease your husband). This is done as part of the IRA setup paperwork and does not require a lawyer, will or trust (in fact, an IRA beneficiary designation as a rule supersedes a will). You may still, however, want to consult an estate planner attorney for more specific questions.
Send questions or comments to Humberto Cruz at AskHumberto@aol.com or by mail to Tribune Media Services, 2225 Kenmore Ave., Buffalo, NY 14207. Personal replies are not possible.
A wife raises a multitude of questions about 401(k) rollovers.
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