Rollovers

In a recent television commercial, a man is shown enjoying his office retirement party at the end of which he is asked to say a few words to his friends and soon-to-be-former co­ workers. "You know what I'm gonna do now?" he gleefully asks. "I'm gonna cash in my 401(k), and my wife and I are taking a trip around the world—first class all the way!" The cheers he is expecting from the crowd are not forthcoming. Instead, his announcement is met with silence and he watches, dumbfounded, while co-workers stare at him shak­ing their heads in a manner that clearly suggests that his plan may not be well thought out—at the least.

Over the next few years, approximately seventy-seven million baby boomers will be faced with deciding what to do with their 401(k) and other plans savings. Loosely translated, that means over $3 trillion moving through the various financial systems!

Each company has different rules regarding their plans and it is best to consult with the administrator about the options available to you. Perhaps you love the plan and would like to keep your assets with the company. Will they let you? The company may have an option to receive lifetime pension income that may appeal to you. Will this income rise with inflation? Will your spouse receive income and at the same rate? Although the options your company may offer may be appealing, the fact that the choices available may be limited beg you to check outside investment options.

As a rule, your best bet at retirement is a direct rollover of your company-sponsored plan assets into a traditional IRA. A direct rollover, i.e., transferring the balance, untouched and in one lump sum, to an IRA allows you to avoid current taxes and penalties. It also gives you access to more investment choices because IRAs allow you to buy individual investments such as CDs, bonds and stocks as well as mutual funds that may not available in standard company retirement plans. The additional investment choices may help you to increase your income and reduce risk.

There are some pitfalls and potential problems in the rollover process. Yet a surprisingly small percentage of peo­ple, particularly those in higher income brackets, plan to engage the services of a financial planner when they get ready to rollover their plans assets at retirement.

If you are among those who will not be consulting a financial planner to guide you in the rollover process, here are some tips on how to avoid costly mistakes. (Warning: "My dog ate the paperwork" is generally not accepted by the IRS as an excuse.)

· Do your homework. Tax rules governing IRAs, Roth IRAs, etc., are complicated and vary depending on what type of account you have or wish to open. These rules do change so don’t assume you know.

· Know the applicable deadlines. You have sixty days to move (rollover) funds from one tax-deferred account to another. Many people miss this deadline. Perhaps they sent the paperwork to the bank with instructions to "put this money into an IRA" but failed to follow up to be sure the rollover was actually completed. Per­haps you made a clerical error in filling out the nec­essary forms, and no one catches the error until after the sixty-day deadline has passed.

· Make copies of all paperwork, checks, and applica­tions. Then send the original documents registered or overnight mail so that if there is a dispute, you will have records that the deposit and information was sent to the receiving firm in a timely manner.

· Make sure the company you are rolling your assets to is one you are familiar with and plan to invest through. It makes for a smoother transition.

To roll or not to roll must be well thought out prior to execution. Mistakes can be costly and may seriously alter your retirement expectations. Be careful and get help if you need it.

What will you do?

More: When (and How) to Save on Taxes by Not Rolling Over That 401(k)

Is An Annuity The Right Investment Choice For Your Retirement Savings?