The goal of this Step-By-Step Guide is to assist you in developing a long-term investment strategy. Certain information herein has been provided by independent third parties whom WTIA believes to be reliable. Although all content is carefully reviewed, it is not guaranteed for accuracy or completeness. In addition, this Guide should not be considered investment or financial planning advice, since only you can decide what your financial goals and requirements are and what your tolerance for investment risk is. Similarly, nothing in this Guide is intended to be estate planning, tax or legal advice, since that type of advice can only be provided by a financial professional in light of your individual circumstances. You should work with a financial professional to develop the specific actions and strategies to reach your retirement goals.
Step 1: Changing Jobs or Retiring – Don't Leave Your Assets Behind
If you are changing jobs or retiring, you may soon have to make a very important financial decision: what to do with the assets you've accumulated in your employer sponsored retirement plan. Just because you've left your job doesn't mean you should leave your money behind.
If you leave your money with your old employer, you may not have as much control over how your money is managed and invested. And if you take your distribution and don't reinvest properly, you might end up taking a big hit on your taxes. The fact is, if you've left your job, chances are you'll be better off taking your money with you.
And if you've already changed jobs or retired, but haven't yet moved your retirement money, it's not too late to investigate your options. Don't leave your assets behind. They are the last thing you want to lose track of! What you decide to do with your retirement money now can have a serious impact on your retirement future.
Need To Consolidate, Retiring, Laid Off, New Job?
Whatever your situation, your Financial Adviser can show you how to keep your money working hard for you. There is a lot to consider if you want to defer paying taxes and avoid possible early withdrawal penalties, while continuing the tax deferral of your retirement savings. Remember, you've worked hard to build that nest egg. Of the options that may be available to you, a direct rollover of your plan assets to an IRA may make the most sense in terms of control, convenience and tax consequences.
STAYING WHERE YOU ARE OR ROLLING OVER TO YOUR NEW EMPLOYER'S PLAN MAY MEAN LESS CONTROL AND cONVENIENCE…AND CASHING OUT OF THE PLAN MAY RESULT IN TAXES AND PENALTIES.
Step 2: Understand Your Rollover Options There are 4 Options You May Choose From When Managing Your Rollover
Option 1 – Leave Your Money In Your Old Employer's 401(k)
While you may have the option to leave the assets of your plan where they are, thereby avoiding
any immediately applicable tax liability or penalty and seemingly keeping things simple, you may
be giving up some measure of control over how your money is managed and invested as:
Investment choices are limited to the investments within the plan.
You can no longer contribute to your plan.
You have limited access to assistance with your plan.
If you end up working in a number of different jobs and choose to take this approach each time
you change jobs, your retirement money may be here, there, and everywhere.
OPTION 1 INVESTOR CHECKLIST
Investment choices are limited to the investments within the plan.
You can no longer contribute to your plan.
You have limited access to assistance with your plan.
Option 2 – Take The Cash
If you cash in your plan assets, you stand to incur an immediate income tax liability and penalty including:
20% withholding for tax purposes as prepayment of federal income tax
10% tax penalty if you're younger than age 591/2 (or age 55 and separated from service).
You'll find yourself responsible for a costly tax bill and penalty which significantly reduces the amount you will receive by up to 30% or more. Take a look at the following chart that illustrates the significant consequences of cashing in your account versus rolling it over. In this example $50,000 is used as the retirement plan distribution amount.
OPTION 2 INVESTOR CHECKLIST
Am I prepared to lose up to 30% or more of my retirement assets?
Do I have a Plan B for funding my retirement? If I spend these retirement monies, what is my
plan for retirement?
Do I have other short-term funding sources rather than raiding my retirement account -
savings, checking accounts, home equity etc.?
(1) This hypothetical example assumes a 27% federal tax rate. Your employer is required to withhold 20% of a cash distribution
($10,000) as prepayment of federal income tax. This 20% will be applied toward the total federal income tax owed in the year
the distribution is made.
(2) If you're younger than 59½ (or age 55 and separated from service).
(3) Assumes 8% state and local income taxes. State and local taxes vary from state to state, therefore, individuals may not receive
the same tax treatment as illustrated here.
Option 3 – Roll it Over into Your New Employer's Plan
This allows for continued tax-deferred growth and is certainly an option if you like the investment alternatives in your new employer's plan. Investment choices will be limited to the investments within the new plan.
OPTION 3 INVESTOR CHECKLIST
Does the new employer's plan accept rollovers?
Do I like the investment options my new employer offers?
Do I want to keep these monies separate in a qualified plan?
Do I have a need to consolidate my retirement monies?
Do I feel comfortable choosing my investment options and managing my money myself?
Option 4 – Roll It Over Into an IRA
This is the option which may make the most sense for you:
It allows continued tax-deferred growth.
It allows for continued contributions to build your account.
It puts you firmly in control of where your money is invested.
You will have the flexibility to consolidate assets from several plans into one rollover account.
It centralizes record keeping for convenience purposes.
It defers any tax liabilities and penalties (if any) until the time you begin making withdrawals.
So you can avoid 20% withholding for tax purposes, a 10% tax penalty, and the potential for losing track of your retirement monies.
It is important to note here, that until 2008 distributions from an employer sponsored plan cannot be directly rolled over into a Roth IRA. These assets must first be directly rolled over into a Traditional IRA. Then, if you are eligible and you pay applicable taxes, you may be able to convert to a Roth IRA.
There are two ways to manage this rollover option:
The Indirect Rollover In an Indirect Rollover, the plan trustee distributes plan assets to you and you must forward the assets to the entity holding your new IRA. The most important thing to remember with an indirect rollover is that you must decide within 60 days of your distribution from the plan where you wish to roll it over or you will be subject to penalties.
BEWARE – THE INDIRECT ROLLOVER MAY INVOLVE UNPLEASANT TAX PENALTIES
With an Indirect Rollover, the amount distributed to you is reduced by a 20% tax withholding.
In addition, if you do not add another 20% to the amount you rollover (to make up for the 20% withheld from the distribution), the 20% withheld for taxes may be considered as part of your taxable income.
If you are younger than age 591/2 (or age 55 and separated from service) any portion of your distribution that you do not rollover and that is taxable may be subject to a 10% early withdrawal penalty.
In addition, if you miss the 60-day deadline for rolling over the distribution, the entire taxable portion of your distribution will be taxed as ordinary income.
The Direct Rollover
In a “Direct Rollover,” the trustee of your retirement plan transfers your account balance under the plan directly to the entity holding your new IRA. In order for a distribution to be considered “directly rolled over,” the qualified plan must either:
Give you the distribution in the form of a check payable to the new IRA trustee or custodian as trustee or custodian of your IRA.
Wire the distribution to the new IRA trustee or custodian.
Mail the distribution directly to the new IRA trustee or custodian.
WITH ALL THIS IN MIND, A DIRECT IRA ROLLOVER MAY BE YOUR BEST OPTION
A Direct Rollover offers a number of benefits:
It allows for continued tax-deferred growth.
You may have a wider range of investment choices.
Continued contributions are allowed.
You avoid paying hefty taxes and penalties for early withdrawal.*
OPTION 4 INVESTOR CHECKLIST
Am I interested in more control and easier management of my retirement monies?
Do I want a comprehensive range of investment choices to choose from so that I can build an asset allocation strategy that works for me?
Would I like professional advice in choosing investments and building this strategy?
Do I have a number of accounts I would like to consolidate?
* IRA withdrawals prior to age 59½ are subject to taxes and possible penalties.
step 3: Do You See Yourself Here?
Taking a Look at Some Common Scenarios
Lucy: Age 29: The Job Changer —
Started her third job in less than 10 years
Her Situation: Lucy has only been investing for a few years.
She has two 401(k)s from the last two companies she worked for, and both are invested in small-cap stocks.* She is concerned about the risk of her portfolio and needs a Financial Adviser to assess her asset allocation to better balance risk and return.
Lucy Has 2 401(k)s
Her Solution: Lucy should consolidate her 401(k) investments into one IRA. She should also work with a Financial Adviser to diversify her portfolio and set up the appropriate asset allocation strategy, using the appropriate mix of investments, for her age and goal.
This should reduce the overall volatility of her investments, while maintaining a bias towards potential long-term growth. Lucy should then continue to contribute to her revamped IRA for its tax benefits.
Her Solution: 1 Rollover IRA
* Small company stocks may be less liquid and subject to greater price volatility than large capitalization stocks.
Theresa: Age 64: Retiring —
Worked 43
years with the same company
Her Situation: Theresa's 401(k) assets are invested in company stock and money markets. She also has a sizable pension. She wants to develop the best distribution strategy for her retirement monies while limiting risk to and growing her portfolio.
Theresa has 1 pension and 1 401(k)
Her Solution: Theresa should work with a Financial Adviser to assess her risk tolerance and consolidate her assets by rolling over her 401(k) and pension lump-sum distribution into an IRA. She should also reallocate her investments into more diversified holdings to reduce the total portfolio risk as well as pursue both the income and growth she needs. Semi-annual meetings with her Financial Adviser will help her to monitor her progress.
Her Solution: 1 Rollover IRA
John: Age 44: The Consolidator — has good intentions but too
many investments to manage easily
His Situation: For 16 years, John has opened a new IRA every other year, contributing $2,000 each time, leaving his retirement assets spread among 5 institutions, 2 brokerage houses and 1 online trading account. He believes his portfolio is well balanced, but there is too much paperwork to see the big picture clearly and quickly. He needs to simplify and focus the management of his investments, while developing an investment strategy that makes sense for him.
John Has 8 IRAs
His Solution: After reviewing in detail the individual holdings in John's many accounts, his Financial Adviser discovered much less diversity of holdings than John thought with lots of overlap. Together they decided to reallocate his portfolio into half as many mutual funds and aggregate all the paperwork into one IRA account. He will have the diversity and asset allocation he was aiming for, as well as the ability to clearly monitor and build upon his account. All future contributions will be made to this account. Consolidation here should add momentum and focus.
His Solution: 1 Rollover IRA
An investment in money market funds is neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money market funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in these funds.
Regardless of your situation, it can make sense to enlist a Financial Adviser to make your money work harder for you. At this point you have several options before you. Your decision will depend greatly on your age and investment objectives. A Financial Adviser can help. Making the right decision can save you from potentially losing a large percentage of your account value to taxes and penalties. Make sure you understand the ramifications of your choice and do what is right for you.
Diversification does not assure a profit nor protect against loss.
Bond prices are senstive to changes in interest rates and a rise in interest rates can cause a decline in their prices.
Mutual funds are subject to risks and fluctuate in value.
step 4: Understand the Difference Between IRA Transfers and Rollovers
Up to this point, this brochure has provided an overview of how to manage a qualified plan – 401(a), 401(k) or 403(b) rollover. Now for a quick word about IRA Transfers and Rollovers.
An IRA Transfer is not the same as an IRA Rollover and it is important to be able to distinguish between the two.
An IRA Transfer can be done as often as desired without limitation and is the usual procedure when moving an IRA from one sponsor, such as a mutual fund company, to another. Sometimes investors will do this if they are dissatisfied with their current IRA Provider. They will initiate movement of their IRA assets from one trustee or custodian to another, and the IRA assets are transferred directly from that trustee or custodian to another, without being distributed to the account holder.
An IRA Rollover is a tax-free distribution to you from one IRA that you contribute, within 60 days, to another IRA. If you make a rollover of any part of a distribution from a Traditional IRA, you cannot, within a 12-month period, make a tax-free rollover of another distribution from the same or another IRA or from the IRA that received your rollover contribution. Most of the rules for rollovers from Traditional IRAs also apply to Roth IRAs.
step 5: Getting Started: Next Steps
Now's the time to talk with your Financial Adviser. He or she can assess your situation, and walk you through your investment options in order to create a plan that is customized for you. You'll gain better control over your investments and you'll establish a relationship with your Financial Adviser who you can turn to as your financial needs grow and change.
Ask your Financial Adviser about the MTB Funds Rollover IRA, a great way to manage your retirement rollover. MTB Funds provides a wide range of mutual fund solutions so that you can build the asset allocation strategy that makes sense for you. Choices ranging from large-cap growth to managed allocation funds, to municipal bond funds and money market funds, allow you to diversify your investments within one mutual fund family.
In addition, MTB offers the Managed Allocation Funds which enable you to put money market, bond or stock funds to work for you in a specific asset allocation combination that can be suitable for your particular situation and goals.* These Funds provide a convenient one decision approach to asset allocation. Conservative, moderate or aggressive options are available based on your investment objectives and risk tolerance.
And if you are looking for an even more tailored and tactical approach to asset allocation and have $25,000 or more to invest, ask your Financial Adviser about Portfolio Architect.
* Due to their strategy of investing in other mutual funds, these funds may incur certain additional expenses and tax results that would not be present
with a direct investment in the underlying funds.
Diversification does not assure a profit nor protect against loss.
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