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Jewish World Review April 23, 2001 / 30 Nissan, 5761

Patrick Larkin

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Consumer Reports

In a buy-out, don't sell out your 401(k) plan -- OK, you decided to take that buyout offer and leave your job.

It's scary; your life is changing. Unless you're ready to retire, you have to find a new job, maybe a new career.

But what are you going to do about your 401(k) plan at the old job? What you decide can save - or cost you - thousands of dollars.

Basically, you've got five choices.

Often, the best choice is to roll the money directly into an individual retirement account. In an IRA, you'll be able to control the investment choices, maintain the tax-deferred status of your money and you may be eligible to convert it to a Roth IRA or move it to your new employer's plan.

If you transfer the money directly - from the trustee of your old employer's 401(k) to the trustee of your IRA - you'll avoid any tax withholding or premature withdrawal penalties.

The second option is a rollover to your new employer's 401(k) plan. Your investment choices may be limited by what the new plan offers, but you avoid any penalties and your retirement savings keep growing tax-deferred.

Be sure the money goes directly to the new plan's trustee - don't touch any distribution check or 20 percent could be withheld for taxes and you won't get it back until you file your annual income tax return.

Option three is to keep the money in your old employer's plan, assuming you have the required minimum balance, usually $5,000. This is the easiest option because there's no paperwork to fill out, no penalties and the money continues to grow tax-deferred.

But your investment choices may be limited and you may have limited access to the money.

The fourth option is to take the money and, within 60 days, roll it over to an IRA. This will give you a short-term use of the money - or at least most of it. Your old employer is required to withhold 20 percent of it and you'll have to file a tax return to get it back.

Also, you'll have to replace the 20 percent that was withheld with your own money to avoid taxes and penalties when your roll it into an IRA. And, this rollover has to take place within 60 days or you face taxes and penalties.

Option 4 1/2 can be considered if your old employer's plan includes company stock. In this case you might be able to take out the stock and not roll it over into an IRA with the rest of the money.

Be sure and run this past your financial planner or accountant, as it's a tricky area.

You'll pay ordinary income taxes on the distribution, but only on the value of the stock at the time it was put into the account. You don't pay taxes on the appreciation of the stock - current or future - until you sell the stock. Then it will likely be taxed at the capital gains rate.

Meanwhile, be sure to roll the rest of the assets directly into an IRA.

Finally, you can take the cash.

You'll pay ordinary income taxes on the cash, a 10 percent penalty if you're under age 59-1 /2, and your former employer is required to withhold 20 percent to cover the taxes.

Assuming you've got $100,000 in your plan and decide to take the money, taxes and penalties can eat up as much as $41,000, assuming you're in the 31 percent tax bracket.

So, study the alternatives, discuss them with your financial adviser, and make sure you understand what you're doing.

Patrick Larkin is a writer with the Cincinnati Post. Comment by clicking here.


© 2001, SHNS