Is a Rollover Right for You?

Friday, February 06, 2009

Is a Rollover Right for You?

As corporations continue to merge, consolidate, and downsize, employees are suddenly facing tough decisions about what to do with their pensions or 401(k)s. The choice you make can have serious implications on your retirement savings and the kind of retirement lifestyle you are able to lead. To stay on track and to benefit from a variety of investment choices, an IRA rollover might be the right option.

Four Options for Handling Retirement Plan Assets
When leaving a job, employees are faced with four options for their retirement plan assets:

1. Lump Sum Distribution - Provides access to a large sum of money, but the distribution is subject to income taxes as well as a 10% federal tax penalty (if the account owner is under the age of 59½)
2. Leave Plan With Current Employer - Money grows tax deferred, and while there is no action required on your part, your investment choices and options may be limited for future distributions
3. Move Money To New Employer's Plan - Money grows tax deferred, and all of your assets are held in the same plan, but not all plans accept assets from other plans and investments may be limited
4. Roll Money Over To An IRA - Money grows tax deferred and there are several investment options from which to choose.

What is an IRA Rollover?
An IRA rollover is the transfer of funds from another retirement plan into an individual retirement account. A Rollover IRA refers to an individual retirement account that is specifically created from distributions received from another type of retirement plan. Anyone who has an eligible distribution can roll it into an IRA. Whether you choose to co-mingle those funds with an existing IRA or create a separate Rollover IRA from which you could later transfer assets back to an employer-sponsored plan is a matter that should be carefully discussed with your financial consultant.

Types of Rollovers
Rollovers can be accomplished in two ways: directly or indirectly. Direct distributions are more common, whereas indirect distributions are most often used when there is an immediate need for income.

• Direct - Distributions from a qualified plan are made payable to the custodian of the IRA, thus avoiding the 20% mandatory withholding tax.
• Indirect - Distributions from a qualified plan are made payable to the employee and are reinvested into an IRA within 60 days of receipt. The distribution received by the employee will be equal to 80% of the plan assets, and it is incumbent upon the employee to contribute the remaining 20% in order to re-deposit to the IRA the full sum of the original plan. If 100% of this distribution is not re-deposited into an IRA before the 60-day period ends, the withheld 20% is not reimbursed.

Distributions
Individuals can take IRA distributions without being assessed the 10% penalty tax if any of the following situations have occurred:

• The account owner has reached or exceeded the age of 59½
• The account owner becomes disabled or dies
• A court order gives distributions to a former spouse
• The distributions are needed to pay
  • Medical expenses greater than 7.5% of the account owner's adjusted gross income
  • Medical insurance premiums incurred due to unemployment when the account owner has received unemployment compensation for a minimum of 12 weeks
  • A down payment for a first home not exceeding the $10,000 lifetime limitation maximum
  • Higher education expenses that meet certain qualifications

When must distributions take place?
An individual must start taking annual distributions from their IRA Rollover, no later than April 1^st of the year following the year they turn 70½. (This rule is suspended for 2009). From that point forward, he/she must receive an annual distribution by December 31^st of each year to prevent an additional tax penalty.

At MutualFinancial Investment Services, licensed Investment Representatives are available to help you select the right investment options when you are faced with early retirement, changing or losing a job, or any other lifestyle changes that warrant a review of your financial plan. For more information, simply stop by any of our branch offices and ask any bank employee to arrange a free no-obligation consultation, or call MutualFinancial Investment Services at 1-800-382-8031 ext. 2811.

Securities offered by and Investment Representatives registered with UVEST Financial Services, member FINRA/SIPC. UVEST and MutualBank are independent entities.

This material has been prepared by Merrill Anderson, Co.