Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, December 6, 1993 TAG: 9312040031
SECTION: MONEY PAGE: A-10 EDITION: METRO
SOURCE: MAG POFF
DATELINE: LENGTH: Medium
What investments can you suggest to replace the retirement investment? Also, how conservative should I be in selecting from the three investment options offered by my previous employer? Please explain annuities and the risk of mutual funds.
A: You should invest the maximum amount of $2,000 a year in an Individual Retirement Account. That is about the only comparable retirement vehicle available to employed individuals.
Your investment in the 401(k) plan of your prior employer depends on your individual circumstances. The younger you are, the more risks you should take. That means investing in stock mutual funds and the like because you have the time to ride out downturns in the market. You become more conservative as you near retirement age. Most people, however, are too conservative in handling their retirement money. Remember also that you can spread these funds among two or three options.
If you are relatively young, you can put your retirement savings outside the plan in various mutual funds as well. You will be taxed on the dividends, but the tax on the gains in share value will be postponed until you cash in the investment.
The advantage of an annuity is that it will pay you a reliable fixed income in retirement for a period you choose, including the rest of your life. The disadvantage is that this payment will be eroded by inflation. Most annuities also carry high commissions and heavy penalties for early withdrawal. Mutual funds have potential for gain, but also for losses. You have to look for funds with low annual fees and small or no sales charges.
Special IRA needed
Q: My daughter recently left a company after 16 years of service. She was vested in the company pension plan. Her new employer has no pension plan.
What are her options as to the transferability of her vested amount in the plan? She has been informed that the amount is approximately $9,800 and that there is a two-year waiting period before cash-out.
Under ERISA, is the cash-out mandatory? If so, can this be transferred tax free to an IRA or annuity? Can she elect to leave the amount in the plan and receive retirement benefits at retirement age based on the plan formula?
A: Your daughter may have two options, according to J. Gregory Tinaglia of Investment Management Corp. in Roanoke.
One is to keep it in the pension plan of her former employer, but Tinaglia said this is possible only if the plan permits it. This is controlled by the provisions of the legal trust document that set up the plan, not the law. Some plans say a departing employee must take the money; other plans allow a former employee to leave the money until age 65. She should ask her former employer if she has this option.
The second choice - and the one Tinaglia would make in any case - is to take the money and roll it into a special IRA. He warned against comingling this money with any other IRA so that you can retain the tax advantages for lump-sum distributions from retirement plans. Your daughter also would keep the option of rolling over the money into the pension plan of any future employer.
You cannot put the money into an annuity, but you can purchase an annuity inside the IRA if you wish.
The plan, not the Employee Retirement Income Security Act, controls cash-out provisions.
Tinaglia would choose the IRA and leave the money there until retirement. He said this would give you better control over how the money is invested.
Be certain the money is transferred directly to the trustee of the IRA or of any new plan so that you avoid income tax withholding.
Mag Poff will help find answers to your personal finance questions. Send them to her at the Roanoke Times & World-News, P.O. Box 2491, Roanoke 24010. Or leave a recorded message by calling (703) 981-3434 and when asked for a mailbox number, press 66639 (MONEY), followed by the # symbol.
by CNB