Retirement Plans - Continued

If you leave your job, you have 3 good options. You can leave your money right where it is (if it is more than $1,000). You can roll your money over into the retirement plan offered by your new employer. Or you can roll your money into an IRA (if your adjusted gross income that year is less than $100,000). All brokerages will handle this trustee-to-trustee transfer for you when you fill out a simple short form. The typical 401(k) plan offers relatively few investment options, but with a brokerage firm, your options are limitless.

Another option is to cash it out. But if you’re under 55, you’ll be paying not only the 10% penalty, but also state and federal income taxes. Cashing out when you lose your job and 55 or older will not trigger a penalty.

If you are under 55, there is actually one other option if you lose your job. You can access the money penalty free if you take substantially equal payments based on your life expectancy.

However you'll need to continue with this withdrawal schedule either for five years or until you reach age 59½, whichever comes LAST. Consult with a qualified tax advisor for details.

When rolling your company’s stock from your 401(k) to an IRA, there is an opportunity to save a bundle on taxes (assuming the value of the stock has gone up).

Instead of rolling this part of your plan into an IRA, transfer it to a regular taxable brokerage account, paying the taxes and penalty. You’ll only be taxed on the amount that the shares cost your company, which is probably small. After holding the shares in the new account for 12 months, you can then sell them and only pay the lower rate long-term capital gains tax, either 8% or 18% depending on your taxable income. Check with your tax advisor.

A bit of advice – limit the portion of your 401(k) that is invested in your company’s stock to no more than 20% of your account, 10% if your employer doesn’t match your stock purchases.

Some employees believe that they are in a better position to predict their company’s stock performance since they work there. However, your company has absolutely no control over the stock’s price. If the company runs into hard times, even for a short period, the market will hammer the price.

You could lose most of your retirement savings if you are too heavily invested. Employee’s at Enron in 2001, found this out the hard way, as Enron’s share price tumbled from over $80 down to 60 cents.

And if you think beefing up your 401(k) with your company’s stock shows company loyalty, sorry, you are wrong. Your company isn’t paying any attention to how you choose to allocate your retirement plan.

Most plans offered to employees allow you to choose among various mutual funds in any proportion and combination that you wish. A growing number of 401(k) plans, offered by some companies who use Fidelity or Charles Schwab, are now offering brokerage services allowing employees to buy and sell stocks from their account. This is known as a “brokerage window”.

An often overlooked fact is that even though most withdrawals from a 401(k) are taxable, the contributions you make to the plan lower your adjusted gross income, placing many in a lower tax bracket. This saves you more money, as much as an extra $1,200 a year.

Other Retirement Planning Topics:

1. Retirement Planning
2. IRA’s (Individual Retirement Account) – Traditional IRA
3. Roth IRA – Taking Money Out
4. Employer Sponsored Retirement Plans
5. Retirement Plans - Continued
6. 401K Savings
7. Notes for 403(b) Plan Participants
8. Senior citizens retirement resources
9. Retirement Plans for Small Business and Sole Proprietors
10. Simplified Employee Pension (SEP) IRAs
11. SIMPLE (Savings Incentive Match Plan for Employees) IRA
12. Your own 401(k) for the self-employed
13. Employer Retirement Plan Vesting and Contribution
14. Forgotten Retirement Benefits
15. Other thoughts about retirement accounts
16. Other thoughts about your retirement needs
    

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