EXPERTS ADVISE: TAKE YOUR PENSION FUNDS WITH YOU ©

By Denise Lamaute, Esq.

When changing, leaving or losing a job, the idea of simply leaving your funds with your old employer may not be the best strategy for you. Experts provide seven reasons why you should take a lump sum distribution and transfer those funds to your own IRA rollover account.

Distressed companies may spell disaster.

Large and small companies fall on hard times. When they do, your pension funds may be in jeopardy.

"Pension funds have disappeared like magic," says Mavis Emory, a compensation and benefits expert in Atlanta. "Employees are shocked, angry and left financially insecure when they can’t get their pension funds due to a bankrupt or corrupt former employer," she stresses. "However, once your funds are rolled over, you will not have to worry about your company going broke or your pension funds being mismanaged."

" Many plans don’t allow participants to choose their investments", says Dave Baker of David Rhett Baker, an employee benefits lawyer in Orlando, Florida. "The plan's trustee picks them."

According to Baker, some trustees’ investment choices for 401(k) plans and similar employee selection plans have been known to perform poorly. When this occurs, participants’ account balances drop in value and the account owners, namely the employees, have less to draw from during their retirement.

"If the participant’s benefits are less than $3,500, the plan can "force" a lump sum distribution to a terminating employee, so that participant has no choice," Fred Reish an attorney with the law firm of Reish & Luftman in Los Angeles points out. To avoid paying taxes on any lump sum pension distribution, mandatory or elective, a rollover of those funds is a must.

"If the funds are left in the plan and the participant becomes married, the consent of the spouse will be needed if the participant wishes to name anyone other than the spouse as the beneficiary," says Baker.

"When the funds are left with the plan sponsor, they may not be invested as desired and there is an additional layer of administration to go through for the former participant," says David K. Young, a certified Employee Benefit Specialist in private practice in San Antonio, Texas.

"For example, some plans do not allow a participant to withdraw only parts of the funds, but instead require the participant to choose between a single-sum payment of the account balance or the commencement of a series of installment payments," Baker provides.

Upon your death, your spouse has the option to withdraw your pensions funds and roll them over to a tax-free IRA rollover account. Any other beneficiary would be required to pay taxes on a single-sum payout of your pension funds.

"Some beneficiaries don’t need the money right away and would rather delay the payments in order to avoid the income taxes and to take advantage of the continued tax-free buildup inside the plan," says Baker. "They are stuck if the plan forces them to take the account balance."

Several companies have large portions of their employees’ profit sharing and 401(k) funds in their company stock. By taking your pension funds with you, you keep your employer form using your pension money to prop up its stock.

Many employees who change jobs select a direct IRA rollover as a means to safeguard their pension funds and eliminate some of the pitfalls listed above. With your own IRA rollover account, you get to select the investment company and the investment choices you want.

You can also avoid paying current taxes including any tax withholding on your pension funds with a direct IRA rollover. The key is to open a new investment IRA rollover account first and have your old plan trustee transfer your funds directly to your new plan trustee, called a trustee-to-trustee transfer. This special tax-deferred treatment is also available to your beneficiaries when they inherit your IRA rollover account. Additionally, there is no limit on the amount that can be transferred to your new IRA rollover account.

Once your funds have been transferred to your own IRA rollover account, you can withdraw funds from that account at your convenience (taxes and early distribution penalties apply). You can withdraw a fixed monthly amount that you determine. Or, you can let your entire pension distribution continue to grow in you new IRA investment rollover account. On a tax-deferred basis, your retirement nest egg grows faster. When a financial need arises, you simply make a withdrawal of any amount form your account on an unscheduled basis to meet that financial need.

Amounts transferred to an IRA rollover account when you are not married do not require your spouse’s consent should you change your beneficiary designation (the person who will receive the funds upon your death) during your marriage. With the increasing number of divorces and remarriages, executing a rollover when you are not married gives you greater flexibility to name any beneficiary you want at any time.

So, when exiting your company, it is important that you think about your pension funds and where they should be situated for the best overall benefit to you. Weigh the pros and cons of the tax-free trustee-to-trustee rollover of your lump sum pension distribution. Don’t fall into the trap of committing your pension funds to your former employer automatically before you assess if another option will provide you with greater overall results.

Denise Lamaute, Esq., is a Retirement Investment Specialist with LAMAUTE CAPITAL, INC. 301-654-6623, http://www.investsafe.com; LamauteCap@aol.com

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