If you are approaching retirement age, you will soon be faced with an important decision: What to do with your accumulated funds in your company's retirement plan?
First things first - if the plan is a defined benefit plan, you should meet with the plan administrator to find out what your distribution options are. Defined benefit plans provide, typically, an amount of monthly retirement income that is based on your income during employment and your years of credited service with that employer. Assume that your monthly retirement income will be $3,500 per month, based on a life only annuity option (the typical option). This option provides no guarantees of payment duration, so that if you were to die one month after retiring, your spouse would receive no further retirement income from that plan. Bummer! To prevent you from unknowingly disinheriting your wife, the feds now require her to sign off if you elect an annuity payout that does not include a spousal residual monthly benefit. Bear in mind that providing any spousal residual will reduce the amount of monthly income you will receive while you both are still living, since your combined life expectancies are greater than your individual life expectancy. In such a case, your monthly income might drop to, say, $3,100 per month.
Another important question to ask your plan administrator is whether or not your defined benefit plan provides a cash distribution option. If it does, you might be able to generate more monthly income by taking the commuted benefit amount in cash and shopping for the most competitive annuity from a top rated life insurance company.
If your company plan is a 401(k) plan, you are probably better off moving your accumulated assets to an IRA. The way to do that is to establish the IRA account with a financial institution and then instruct your company's plan administrator to transfer your entire account balance to your new IRA account. Otherwise, if you take the distribution yourself in the form of a check, your 401(k) plan is required to withhold 20 percent of the total distribution, even though you plan on rolling over the amount to your IRA account. You will get that tax money back, but not until you file your tax return for the year in question.
Here are the two primary advantages of moving your retirement dollars to an IRA: Your wife and children will obtain a huge tax break from your IRA in the event of your death, and that is the ability to stretch out the payments from their values over their individual lifetimes. The trap to avoid in bequeathing your IRA monies to your children and grandchildren is leaving monies to your heirs as a group, and not earmarking amounts for each person individually. If you don't name each beneficiary individually, the amounts that each child must withdraw each year will be based on the life expectancy of the oldest beneficiary.
Another plus for the IRA is the ability to establish separate IRA accounts for all of your beneficiaries, each with a different investment strategy - conservative for your wife and more aggressive for the kids.
If you are age 70¬½ and still working, there is a big advantage in leaving your accumulated dollars in the company's 401(k) plan, and that is that you don't have to take any Required Minimum Distributions from the plan so long as you continue to work.
Distribution planning is important, so consult a professional if you have questions.
Got a financial planning question for Greg? You may email him at greg@lifesolutionsonline.net. Roberts is a certified financial planner with 35 years of financial and estate planning experience.
Source: http://www.aikenstandard.com/FeatureColumns/1225-on-the-money-column--3667053
First things first - if the plan is a defined benefit plan, you should meet with the plan administrator to find out what your distribution options are. Defined benefit plans provide, typically, an amount of monthly retirement income that is based on your income during employment and your years of credited service with that employer. Assume that your monthly retirement income will be $3,500 per month, based on a life only annuity option (the typical option). This option provides no guarantees of payment duration, so that if you were to die one month after retiring, your spouse would receive no further retirement income from that plan. Bummer! To prevent you from unknowingly disinheriting your wife, the feds now require her to sign off if you elect an annuity payout that does not include a spousal residual monthly benefit. Bear in mind that providing any spousal residual will reduce the amount of monthly income you will receive while you both are still living, since your combined life expectancies are greater than your individual life expectancy. In such a case, your monthly income might drop to, say, $3,100 per month.
Another important question to ask your plan administrator is whether or not your defined benefit plan provides a cash distribution option. If it does, you might be able to generate more monthly income by taking the commuted benefit amount in cash and shopping for the most competitive annuity from a top rated life insurance company.
If your company plan is a 401(k) plan, you are probably better off moving your accumulated assets to an IRA. The way to do that is to establish the IRA account with a financial institution and then instruct your company's plan administrator to transfer your entire account balance to your new IRA account. Otherwise, if you take the distribution yourself in the form of a check, your 401(k) plan is required to withhold 20 percent of the total distribution, even though you plan on rolling over the amount to your IRA account. You will get that tax money back, but not until you file your tax return for the year in question.
Here are the two primary advantages of moving your retirement dollars to an IRA: Your wife and children will obtain a huge tax break from your IRA in the event of your death, and that is the ability to stretch out the payments from their values over their individual lifetimes. The trap to avoid in bequeathing your IRA monies to your children and grandchildren is leaving monies to your heirs as a group, and not earmarking amounts for each person individually. If you don't name each beneficiary individually, the amounts that each child must withdraw each year will be based on the life expectancy of the oldest beneficiary.
Another plus for the IRA is the ability to establish separate IRA accounts for all of your beneficiaries, each with a different investment strategy - conservative for your wife and more aggressive for the kids.
If you are age 70¬½ and still working, there is a big advantage in leaving your accumulated dollars in the company's 401(k) plan, and that is that you don't have to take any Required Minimum Distributions from the plan so long as you continue to work.
Distribution planning is important, so consult a professional if you have questions.
Got a financial planning question for Greg? You may email him at greg@lifesolutionsonline.net. Roberts is a certified financial planner with 35 years of financial and estate planning experience.
Source: http://www.aikenstandard.com/FeatureColumns/1225-on-the-money-column--3667053
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