Your Retirement Plan—Ready to Rollover?
Simply stated, a rollover means “rolling over” your assets/funds from one qualified retirement plan directly into another. You must enact this transaction within 60 days of receiving the funds from the original plan or you will face a penalty. The transfer is done tax free.
There are several rules governing rollovers. Any part of the taxable portion of a distribution from a qualified plan, annuity plan, or tax-sheltered annuity (TSA)—other than a minimum distribution—
may be rolled over tax free to an Individual Retirement Account (IRA), annuity, or other qualified plan. However, if the distribution is in the form of certain periodic payments, a rollover is not allowed.
How to Make a Rollover
Rollovers can be done in two ways: Option 1: You (the plan participant) may receive the distribution yourself, but you must reinvest it into an IRA or qualified plan within 60 days. This form of distribution (where you actually receive cash) is subject to a 20% with-holding requirement. Under the law, a 20% withholding rate is imposed on distributions that are eligible for rollover but that aren’t transferred
directly to an eligible transferee plan. The employer must withhold taxes for these distributions.
This means that employees receiving direct distributions will receive only 80% of their account since 20% is withheld. However, the withheld funds may be refunded after the employee files his or her tax return, as long as the distribution is rolled over into another IRA or qualified plan within 60 days.
Since the 20% that is withheld is treated as a taxable distribution, the employee will need to make up the withheld 20% from his or her own funds to achieve a 100% tax-free rollover; otherwise, the 20% withheld will be treated as taxable. In addition to the income taxes owed on that 20%, the employee will also be required to pay a penalty tax of 10% if he or she is under the age of 59½.
Option 2: To avoid the 20% withholding requirement, the employee may request a direct trustee-totrustee transfer to an IRA or qualified plan. Annuities allow payees of eligible rollover distributions to choose a direct trustee-to-trustee transfer. However, a qualified plan is not required to accept this form of transfer. This type of transfer is considered a distribution option, so that spousal consent and other similar participant and beneficiary rules of protection will apply. There are many factors to consider in deciding when and how to use a rollover. Getting knowledgeable assistance from a professional can make the difference between a “rocky” rollover and a smooth, effective one.
The Power of Legal Protection
Without the proper legal, financial, and health care protection, you may be at risk should you become incapable of directing your own affairs. Advance directives are important planning tools that can set
forth your preferences in the event an accident or illness impairs your ability to make decisions. Let’s look at three tools that can help you prepare for the future: a durable power of attorney, health care
proxy, and living will.
Durable Power of Attorney
A durable power of attorney grants authority to another person to make legal and financial decisions on your behalf at any time, even in the event of mental incapacity. The powers granted can range from broad to limited in scope. With a durable power of attorney, your designee can assist you with decisions
regarding your financial and tax situation, investments, insurance transactions, government benefits, estate plans, retirement plans, and business interests. In the absence of such legal protection,
court intervention (with the accompanying time and expense) may be necessary. A durable power of attorney is generally inexpensive and easy to implement.
Health Care Proxies
While a durable power of attorney grants authority to another person to make financial decisions, a
health care proxy (also known as a medical durable power of attorney or a durable power of attorney for health care) appoints someone to make health care decisions on your behalf. This directive only takes effect if you are unable to direct your own medical care, and you can generally change or revoke
it at any time. A health care proxy does not enable the designated person to make any financial, legal, or business decisions on your behalf, only medical decisions. In addition to a health care proxy, it is also common tohave a living will.
A living will generally allows you to state your preferences regarding the giving or withholding of life-sustaining medical treatment. In most states, you must have a terminal condition, be in a
persistent vegetative state, or be permanently unconscious before life support can be withdrawn.
The definition of these terms and the medical conditions covered may vary from state to state.
It is important not to confuse a living will with a testamentary will, which provides for the disposition
of property upon death. One is never a substitute for the other. Federal law (the Patient Self Determination Act of 1991) requires hospitals to inform patients about advance directives. With
health care proxies and living wills, you are able to guide your future medical care, even if you become
unable to make informed decisions. To help ensure that your legal and financial wishes are also met,
legally appoint someone you trust with a durable power of attorney.
Debt Management: Strategies for Success
Most everyone has, at some point in their lives, accumulated personal debt—some more than others.
Whether debt is a cause for concern depends upon a number of factors, including: how the
economy is faring; your particular earning and economic prospects for the near and long term; and
the type of debt you incur. By being conscious of your spending habits, including credit card use and large purchase habits, you can better understand ways to control debt—before it starts to control you.
According to the U.S. Attorney General and the Bureau of Consumer Protection, approximately
nine million individuals have turned to credit counseling agencies. One reason for this is debt incurred by credit cards. In fact, consumers nationwide have accrued approximately $700 billion in credit card debt alone (U.S. Attorney General, 2003). To gain a perspective on personal debt, it is useful to distinguish between healthy and unhealthy debt. Healthy debt refers to borrowing in order to purchase assets that are likely to appreciate in value, such as a home or business. Healthy debt is especially worthwhile to assume if you are able to itemize certain repayments (e.g., home mortgage interest) on your tax return and, as a result, qualify for certain tax deductions. Unhealthy debt, on the other hand, refers to borrowing in order to purchase consumables or assets that are likely to depreciate in value, such as a vacation or an automobile. Unhealthy debt has taken an even more negative turn since the government stopped allowing tax deductions for most consumer debts, such as personal loans and credit cards.
Debt Management Basics
For most people, managing debt effectively is a learned skill. The following pointers may help you get your debt under control: Categorize debts. Start by developing an overall picture of your current debt situation, Debts should be categorized as healthy or unhealthy. They should then be scheduled according to whether they are short term (e.g., credit cards), intermediate-term (e.g., auto loans), or long-term (e.g., mortgages and home equity lines of credit). The interest rate for each type of debt should be noted. Pay off the “right” debt first. It usually makes the most sense to pay off high interest rate debt first, especially if the interest is not tax deductible (e.g., credit cards). Ideally, you should have enough in savings to pay off short term debt. Because credit cards are typically used to purchase consumables, rather than assets that appreciate, they can easily tempt consumers to live beyond their means. Thus, it is best to develop the habit of paying off this type of debt on a monthly basis. Avoid the minimum payment trap. Interest that accumulates by stretching out payments can make even a “bargain” costly in the long run. To understand the impact of making only minimum monthly payments, you may want to ask your credit card company how long it would take to pay off your current balance at that rate, and how much total interest you will ultimately pay. This information
prompts many individuals to adopt a “pay-as-they-go” strategy.
Curb impulse spending.
You may find it best to avoid shopping when you don’t have a specific purpose in mind. Or, you could try to delay impulse purchases for 24 hours. Once you have had a chance to “sleep on it,” you may discover the impulse has passed.
Benefits in Good Times and Bad
If you are like many people, spending may not be based solely on financial considerations. Emotional
factors may sometimes cause confusion between what you think you need, and what you actually do need. Still, the reality of living in the twenty-first century may leave you with little choice but to amass at least some debt. However, with discipline and planned spending, you can most likely manage your debt and live within your means.
Cash, Castles, Future Compensation—What Makes Up Your Estate?
Although you may not own a castle, do you know which of your “treasures” will be included in your estate? Federal estate taxes can take a large chunk out of the assets you hope to leave your heirs—as much as 48% in some cases. Federal estate taxes will generally be due if the value of your taxable estate at your death exceeds $1,500,000 (in 2004).
Treasury regulations relating to the taxation of property owned at death contain a catch-all definition
stating that the “gross estate of a decedent who was a citizen or resident of the United States at the
time of his death includes the value of all property—whether real or personal, tangible or intangible, and wherever situated—beneficially owned by the decedent at the time of his death.” What does this
mean? The first step in understanding the potential implications of the federal estate tax is to understand some of the major items that may comprise your estate:
- Personal assets. Most people who have looked into the matter are aware that their personal property, savings, real estate, and retirement plans, as well as the proceeds of any life insurance policies they own, are included in their estates.
- Rights to future income. What may be less well known is that rights to future income, such as rights to payments under a deferred compensation agreement or partnership income continuation plan, may be includable in your estate. These rights are commonly referred to as “income in respect of a decedent (IRD)” and may be includable at their present commuted value.
- Business interests. Likewise, interests in any business you own at death, whether as a proprietor, a partner, or a corporate shareholder may be includable in your gross estate.
- Social Security benefits. The value of Social Security survivor benefits received as either a lump sum or a monthly annuity is not included in your gross state.
Reassess Your Goals
The actual task of determining what may be included in your gross estate may require professional,
in-depth analysis. It is also wise to have your estate reevaluated periodically to help protect your
beneficiaries and heirs from having to choose between fulfilling your wishes and meeting federal
estate tax requirements. In addition, bear in mind that certain estate planning documents, coupled with adjustments to property ownership arrangements, can help minimize estate taxes and maximize estate tax credits. Consider consulting with your qualified financial, legal, tax, and insurance professionals to help ensure your current decisions are consistent with your longrange estate planning goals and objectives.