Required Reading on Retirement Rollovers

Those about to retire have always been vulnerable. All of a sudden, they start getting more mail about how this company or that brokerage can help them make all the right moves. It’s practically impossible to know whom you should trust and when you should run the other way.

The Nest Egg
For most retirees, the nest egg is the single biggest pool of money they’ve ever seen. And the scariest.

Insecurities abound: How should I invest the money, what if I lose it, how much can I take out each month, what if I spend too much, will I run out of money?

This is one time in your life when you really do need a real, live person to help you make good decisions. Computer models are helpful, but they can’t begin to answer all the questions a retiree is losing sleep over.

So how do you begin the process of sorting out whom you can and should trust?

A Matter of Trust
Better to be a skeptic than too trusting. Ask yourself (and potential advisors) these questions:

1. How will this advisor be paid? If advisors tell you their advice is “free,” chances are you should get up and leave. Nothing is free. Some advisors’ advice is tied to products. That is generally seen as a conflict of interest. Even so, there are advisors out there who do care about your well-being who will make a commission when they sell you a product. The alternative is going to a fee-only planner who doesn’t sell anything but their time. Know the difference between “fee-only” (meaning no commissions) and “fee-based” (may have some commissioned sales).
2. How many clients does the advisor serve? While a planning firm may serve several hundred clients, each individual advisor will typically serve around 70 asset management clients. You want someone who will answer your phone calls promptly. You want someone who actually knows who you are and what your concerns are. The person at the firm with whom you initially meet may be responsible only for drawing clients in and introducing them to the firm: He or she may not be responsible for “servicing” your account. Be sure to get to know the people who will work with you day to day. Do they have the credentials you think are important? Do they have a good rapport with you? If they make you feel like you are asking “dumb” questions, walk out.
3. Can I talk to a current client in my own circumstances? Most advisors are happy to give out references. You’ll be able to get a good sense of how others view the advisor. If the advisor won’t give you references or doesn’t have other clients who are about to retire or who have just retired, keep looking for a more appropriate advisor.
4. What is the advisor’s investment approach? If you are concerned with preserving principal, you don’t want to find out the advisor has an aggressive style that doesn’t make you comfortable. If the advisor touts performance over the past year, be sure to ask how he or she did from March 2000 to December 2002. If you can’t stomach the answer, keep looking.
5. How often will the advisor contact me? Typically you’ll receive quarterly investment reports and an annual rebalancing meeting. Some advisors will allow your input into the investment process. Some won’t. If you’re more comfortable with one approach versus another, make sure you will be accommodated.

You may or may not need investment advice from a professional retirement advisor. But you may need help understanding tax traps, choosing the order in which to tap your assets, and calculating how much you can spend without bankrupting yourself.

The Rollover Process
There is a lot of confusion over just what you can and can’t do.

• You can roll over a company retirement plan to a traditional IRA.
• You can’t roll over a company retirement plan directly to a Roth IRA.
• You can roll over your company retirement plan to a traditional IRA first, then convert it to a Roth IRA by paying tax on the amount you want to convert.
• If you convert to a Roth IRA you will never have to take required minimum distributions.
• If you roll over to a traditional IRA, you will have to start taking minimum required distributions at age 70 ½.
• If you do a “direct” rollover, you are not limited to how many times you roll over your account. A direct rollover means your nest egg is either wire-transferred to the new IRA custodian or a check is made payable to the custodian to be deposited in your account. 
•  If you don’t do a “direct” rollover, your company will have to take tax out of your distribution amount. If you plan to roll over your whole nest egg, you’ll have to make up the amount taken out for tax from other assets. If you don’t make it up, you’ll be taxed on the distribution and there could be penalties too. You have 60 days to get your rollover deposited, or it is all taxed! You are limited with this type of rollover (where you get a check made out to you) to one rollover a year.
• If you never plan to roll your company retirement distribution into a new company retirement plan, there’s no reason why you can’t combine it with other IRAs you may already have.
• Once your money has rolled over to an IRA, you can invest in just about anything--stocks, bonds, mutual funds, CDs, etc.

A Taxing Event
There are many twist and turns on the road to retirement. If you retire before you’re age 55, you’ll have to wait to tap your retirement account or face paying penalties on top of income tax. If you are between age 55 and 59 ½ and you have a company retirement plan, you may not want to roll it over right away. You are allowed to take penalty-free distributions from a company retirement plan between those ages, but the penalties apply to IRA distributions before age 59 ½.

If you own company stock in a retirement plan, there is another set of rules that apply to you. You can choose not to roll over the company stock and pay tax immediately. Why would you want to do that? Because you are allowed to pay ordinary income tax on the basis of the stock and capital gains rates on the appreciation above the basis. Sound confusing? You betcha.

Retirement itself is not so difficult. Sure, you’ll need to adjust to a different schedule and perhaps a different lifestyle, but those things can be very pleasant. The best way to have a successful and stress-free retirement rollover is to start educating yourself about the issues involved early (ideally at least five years before you plan to retire).