Reprinted from T. Rowe Price Report Spring 2007 Issue
Changing Jobs or Retiring?
Options for Your Retirement Plan Assets
The popularity of 401(k)s and other
employer-sponsored retirement plans
have turned many Americans into
investors. But as simple and convenient as these plans make retirement
saving, sooner or later participants
must decide what to do with the
money in their accounts.
The decisions aren’t easy. When
leaving a job or retiring, you have
several options for handling your
account that can affect your long-term
goals and may have immediate tax
consequences as well.
Roll over to a Traditional IRA.
You can move your money from
your company retirement plan to a
Traditional IRA (or Rollover IRA)
and maintain the tax-deferred status
of your assets. Rollover IRAs have
several advantages over leaving your
assets in an employer plan, including
typically having more flexibility in
your investment choices. Your assets
can be invested in a wide range of
investments, including mutual funds,
stocks, bonds, annuities, and certificates of deposit. Later on, you may be
able to move the IRA assets to your
new employer’s plan if you wish.
In some cases, IRA assets can also
be used for higher education and
first-time home purchases without a
tax penalty, but ordinary income taxes
would apply to any earnings. Note
that you cannot roll over any required
minimum distributions made by your
plan for that year.
An eligible participant with Roth
money in a 401(k) or 403(b) plan currently can roll over directly to a Roth
IRA. Starting January 1, 2008, eligible
individuals may directly roll over any
assets from qualified retirement plans
into a Roth IRA, streamlining the
process. Of course, taxes would have
to be paid on the taxable portion of
the amount rolled over.
Under the Pension Protection Act
of 2006, individuals whose modified
adjusted gross income (MAGI)
exceeds $100,000 and individuals who
are married and filing a separate tax
return are not eligible to roll over
non-Roth assets from an employersponsored plan to a Roth IRA.
Effective January 1, 2010, however,
the Tax Increase Prevention and
Reconciliation Act of 2005 (TIPRA)
will remove these restrictions.
With a Roth IRA, the assets can be
withdrawn tax-free in retirement (after
age 59½) as long as the account has
been established for at least five years.
Leave savings in the plan. If
you have $5,000 or more in your
employer’s plan, you can generally
leave your assets in your employer’s
plan. This is the simplest choice, and
like an IRA account, it enables you
to keep your money invested on
a tax-deferred basis. You can later
choose to roll these assets over to an
IRA or another employer’s plan. If
your balance is below $5,000, plan
rules determine whether your money
can remain in the plan.
If you are 55 or older but under
age 59½ at the time you separate from
service, it may be to your advantage
to leave your assets in the plan and
not roll them over until you attain
age 59½.
If you plan to withdraw any of
the assets from the account prior to
age 59½, you can usually leave them
in your employer plan and simply
withdraw assets as you need them.
Comparing an IRA Rollover vs. Cashing Out*
Your vested account balance
Cash
Roll Over
Out
to IRA
$50,000
$50,000
12,500
–
5,000
–
Total taxes/penalty
17,500
–
Total account after taxes
32,500
50,000
124,580
233,048
Taxes due
10% early withdrawal penalty before age 59½
Projected account value at retirement in 20 years
Difference between taxable and tax-deferred account
$108,468
* The “Cash Out” column shows the growth of your money in a taxable account assuming an after-tax rate
of return of 7.24%. This is calculated by using the 8% rate of return assumed in the tax-deferred account
and reducing it for taxes, assuming a 25% income tax rate and a 15% rate on dividends and capital
gains. The “Roll Over to IRA” column shows the growth within a tax-deferred account which assumes
an 8% annual pretax rate of return. This value is still subject to taxation upon withdrawal. Example is for
illustrative purposes only and is not intended to represent the results of any specific security.
Source: T. Rowe Price Associates
In this situation, be sure to consult a
knowledgeable financial advisor before
making your rollover decision, since
your decisions are usually irrevocable.
Cash out savings from the plan.
When you terminate employment
you may decide to have your former
employer provide a check payable
to you for the amount in your plan
account. Know all the rules before
you proceed because this option can
be both complicated and expensive.
In most cases, your check will be for
80% of your vested account balance;
the rest must be withheld for federal
income taxes.
The entire distribution usually will
be taxed as ordinary income in that
year, unless you roll over the money
to a Traditional IRA or another
employer’s plan within 60 days. If you
want to roll over the entire distribution, any amount that is withheld
must be made up from your pocket.
(Depending on your tax situation, you
may get this back after you file your
income tax return for the year.)
Depending on your age, a 10%
premature withdrawal tax penalty
may also apply to any withheld
amounts that are not repaid.
If you withdraw the money and
simply spend it, you may come
to regret your decision when you
are ready to retire. In order to
save enough to have a comfortable
retirement you will need to rely on
the tax-deferred investment of your
savings for as long as possible. Most
people who spend it now find it very
difficult to play “catch up” later, and
even if they have the ability to do so,
they will be subject to annual retirement account contribution limitations.
Move savings to a new employer’s
plan. Many employer plans accept
rollovers, although they are not
required to do so. If you can roll over
your assets to your new employer’s
plan, you’ll avoid current taxes and
penalties and any future earnings
growth will be tax-deferred.
Your new plan may also allow you
to take loans, something you can’t do
with an IRA. You will be subject to
your new employer’s plan rules on
distributions, and your investment
options will be limited to those available in the new plan. We suggest you
request a “trustee-to-trustee” transfer
of the assets, which will greatly
simplify the process for you.
If you would like assistance with
a Rollover IRA, call our rollover
specialists at 1-800-IRA-5000.
They will review the entire rollover
process step-by-step and open the
account over the phone. You can also
open a rollover account online at
www.troweprice.com/rollover.
Help for Making Rollover Decisions
T. Rowe Price offers several free educational tools to help you understand
your rollover options when you change jobs or retire and the pros and cons
of various rollover decisions you may have to make. These include:
Rollover Personal Guide
This Web-based “personal guide” provides information on the pros and
cons of various options. The guide also aims to make the rollover process
less confusing by explaining issues such as the differences between direct
and indirect rollovers, how to handle outstanding loans from current 401(k)
plans, and the options available if the current plan includes company stock.
Distribution Calculator
This free Web calculator helps you determine the financial impact of taking
a cash distribution from an employer-sponsored retirement plan versus
keeping your money invested in a tax-deferred account. After entering your
account balance, birth date, tax bracket, and expected rate of return, the
calculator shows what your remaining balance would be after taxes and
possible penalties for early distribution. The calculator also compares what
your original account balance could grow to by your retirement age (the
calculator assumes a retirement age of 65) if it remained invested taxdeferred compared with the potential value if it were reinvested in a taxable account.
Rollover Planner CD-ROM
This free, interactive CD-ROM combines the distribution calculator and the
Rollover Personal Guide content with short videos that offer insights from
T. Rowe Price financial planners on key rollover issues. The CD-ROM can be
ordered by calling 1-800-IRA-5000.
Those ready to begin the process can complete their rollover online or over
the phone. T. Rowe Price can also coordinate the paperwork for transferring
assets and provide guidance on determining an appropriate asset allocation strategy. Additional details and links to these tools are available at
www.troweprice.com/rollover or by calling us at 1-800-IRA-5000.
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11/07