When to consider IRA rollovers
By Dave Claus dave@wagnerfinancial.com

Q: I'm leaving my employer. Should I consider an IRA rollover from my former employer's retirement plan?

A: Millions of employees will change jobs this year through career moves, layoffs or retirement. If you are one of these employees, chances are that this change has left you with a lot to think about. And one important decision you need to make is what to do with your retirement savings.

You have several options, which include leaving the funds in your former employer's retirement plan (if the plan allows it), transferring it to a new employer's plan (if the plan allows it), taking a distribution in cash (penalties and taxes may apply) or rolling it to an IRA.

One of the most widely used retirement distribution options is to roll over your retirement savings into an IRA. Rolling an employer-sponsored retirement plan into an IRA can yield a number of benefits for you, the investor. The benefits may include increased investment options and consolidation of retirement accounts.

New tax laws now allow nonspousal heirs to roll a deceased person's workplace retirement fund into a special IRA known as an inherited IRA. The beneficiary must make annual withdrawals from the inherited IRA but is allowed to spread these out over his or her lifetime.

For people with some employer stock in their retirement accounts, the retiree or the heir of an undistributed retirement account can split the account into two. One portion would be made up of employer stock. That amount would be taken as a lump-sum distribution- - in stock- - and the employer stock would be placed in a taxable account. The other portion would be taken out and placed in a rollover IRA.

The distributed stock portion would be taxable, but only on the cost of the stock. In other words, if the stock was purchased for a total of $50,000 but is now worth $250,000, the heir will pay ordinary income tax on just the $50,000 original cost. The rem a i n i n g $200,000 in value would not be taxable until the stock is sold. Then it would be taxed at capital gains rates, which max out at 15 percent versus the 35 percent ordinary income tax rate.

When considering an IRA rollover it is important to know the Internal Revenue Service rules. Basically there are two options: You can request that the check be made payable to you or have the check made payable to the IRA institution to which you're transferring your funds.

If you take possession of your retirement distribution and the check is made payable to you, your former employer is required to withhold 20 percent of the distribution as a prepayment of the federal income tax. In addition to the taxes that are withheld, you have 60 days to roll the money to an IRA to avoid penalties (if under the age of 59 1/2)

The preferred method of rolling funds to an IRA is to have the IRA institution request the funds directly from the employer-sponsored plan. Direct rollovers between firms eliminate the 20 percent withholding requirement.

Your retirement plan distribution may very well be one of the largest amounts you've ever invested at one time. What you do with this money can affect how well you live during your retirement years. It is best to consult a financial professional before making decisions about your retirement distributions.

Securities and investment advice is offered through Transamerica Financial Advisors, Inc., 1001 Partridge Drive, Ste. 110, Ventura, CA 93003, (805) 339-0760, ext. 105.