Rollovers

In general, a rollover is the movement of funds from one retirement savings vehicle to another. You may want, or need, to make a rollover for any number of reasons–your employment situation has changed, you want to switch investments, or you’ve received death benefits from your spouse’s retirement plan. There are two possible ways that retirement funds can be rolled over–the 60-day rollover and the trustee-to-trustee transfer.

The 60-day, or indirect, rollover

With this method, you actually receive a distribution from your retirement plan and then, to complete the rollover transaction, you make a deposit into the new retirement plan that you want to receive the funds. You can make a rollover at any age, but there are specific rules that must be followed. Most importantly, you must generally complete the rollover within 60 days of the date the funds are paid from the distributing plan.

If properly completed, rollovers aren’t subject to income tax. But if you fail to complete the rollover or miss the 60-day deadline, all or part of your distribution may be taxed, and subject to a 10% early distribution penalty (unless you’re age 59½ or another exception applies).

Further, if you receive a distribution from an employer retirement plan, your employer must withhold 20% of the payment for taxes. This means that if you want to roll over your entire distribution, you’ll need to come up with that extra 20% from your other funds (you’ll be able to recover the withheld taxes when you file your tax return).

The direct rollover

The second type of rollover transaction occurs directly between the trustee or custodian of your old retirement plan, and the trustee or custodian of your new plan. You never actually receive the funds or have control of them, so a trustee-to-trustee transfer is not treated as a distribution. Trustee-to-trustee transfers avoid both the danger of missing the 60-day deadline and, for employer plans, the 20% withholding problem.

With employer retirement plans, a trustee-to-trustee transfer is usually referred to as a direct rollover. If you receive a distribution from your employer’s plan that’s eligible for rollover, your employer must give you the option of making a direct rollover to another employer plan or IRA.

A trustee-to-trustee transfer (direct rollover) is generally the most efficient way to move retirement funds. Taking a distribution yourself and rolling it over makes sense only if you need to use the funds temporarily, and are certain you can roll over the full amount within 60 days.

Should you roll over money from an employer plan to an IRA?

In general, you can keep your money in an employer’s plan until you reach the plan’s normal retirement age (typically age 65). But if you terminate employment before then, should you keep your money in the plan (or roll it into your new employer’s plan) or instead make a direct rollover to an IRA?

There are several reasons to consider making a rollover. In contrast to an employer plan, where your investment options are limited to those selected by your employer, the universe of IRA investments is almost unlimited. Similarly, the distribution options in an IRA (especially for your beneficiary following your death) may be more flexible than the options available in your employer’s plan.

On the other hand, your employer’s plan may offer better creditor protection. In general, federal law protects your total IRA assets up to $1,245,475 (as of April 1, 2013)–plus any amount you roll over from a qualified employer plan–if you declare bankruptcy. (The laws in your state may provide additional protection.) In contrast, assets in an employer retirement plan generally enjoy unlimited protection from creditors under federal law, regardless of whether you’ve declared bankruptcy.

Rollover from: Rollover to:
Traditional/SEP-IRA SIMPLE IRA Roth IRA Qualified Plan (incl. 401k) Roth 401k/403b/457b account 403b Plan Governmental 457b Plan
Traditional/SEP-IRA-Taxable dollars1 Yes2 No Yes3 Yes7 No Yes Yes9
Traditional IRA – nontaxable dollars1 Yes2 No Yes4 No No No No
Simple IRA1 Yes5 Yes Yes3,5 Yes5,7 No Yes5 Yes5,9
Roth IRA1 No No Yes2 No No No No
Qualified Plan – taxable dollars (incl. 401k)6,7 Yes No Yes11 Yes No12 Yes Yes9
Qualified Plan – nontaxable dollars (incl. 401k)6,7 Yes No Yes Yes8 No12 Yes8 No
Roth 401k Account6,7 No No Yes No No10 No No
Roth 403b/457b Account6 No No Yes No No10 No No
403b Plan – taxable dollars6 Yes No Yes11 Yes7 No12 Yes Yes9
403b Plan – nontaxable dollars6 Yes No Yes Yes8 No12 Yes8 No
Governmental 457b Plan6 Yes No Yes11 Yes7 No12 Yes2 Yes

1Required distributions and nonspousal death benefits can’t be rolled over.

2In general, you can make only one tax-free, 60 day, rollover from one IRA to another IRA in any one year period no matter how many IRAs (traditional, Roth, SEP, and SIMPLE) you own. This does not apply to direct (trustee-to-trustee) transfers, or Roth IRA conversions. (A special rule applies to 2014 rollovers.)

3Taxable conversion

4Nontaxable conversion

5Only after employee has participated in SIMPLE IRA plan for two years.

6Required distributions, certain periodic payments, hardship distributions, corrective distributions, and certain other payments cannot be rolled over; nonspousal death benefits can be rolled over only to an inherited IRA, and only in a direct rollover.

7May result in loss of qualified plan lump-sum averaging and capital gain treatment.

8Direct (trustee-to-trustee) rollover only; receiving plan must separately account for the after-tax contributions and earnings.

9457(b) plan must separately account for rollover–10% penalty on payout may apply.

10Nontaxable dollars may be transferred only in a direct (trustee-to-trustee) rollover.

11Taxable dollars included in income in the year rolled over.

12401(k), 403(b), and 457(b) plans can also allow participants to directly transfer non-Roth funds to a Roth account if certain requirements are met (taxable conversion).

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Albert Aizin, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, resources.hewitt.com, access.att.com, hewitt.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Merck, Raytheon, ExxonMobil, Glaxosmithkline, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Albert Aizin is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

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Retirement Income Investing: Beyond Annuities

One of the challenges of investing during retirement is providing for annual income while balancing that need with other considerations, such as liquidity, how long you need your funds to last, your risk tolerance, and anticipated rates of return for various types of investments. Annuities may be seen as a full or partial solution, since they can offer stable income or guaranteed lifetime payments (subject to the financial strength and claims-paying ability of the issuer). However, they’re not right for everyone.

A well-thought-out asset allocation in retirement is essential. While income investments alone are unlikely to meet all your needs, it’s important to understand some of the most common non-annuity investments that can provide income as part of your overall investment strategy.

Bonds: retirement’s traditional backbone

A bond portfolio can help you address investment goals in multiple ways. Buying individual bonds (which are essentially IOUs) at their face values and holding them to maturity can provide a predictable income stream and the assurance that you’ll receive the principal when the bond matures unless a bond issuer defaults. (Bear in mind that if a bond is callable, it may be redeemed early, and you would have to replace that income.) You also can buy bonds through mutual funds and exchange-traded funds (ETFs). Bond funds are subject to the same inflation, interest rate, and credit risks associated with their underlying bonds. Depending on your circumstances, funds may provide greater diversification at a lower cost than individual bonds. However, a bond fund has no specific maturity date and therefore behaves differently from an individual bond, though like an individual bond its price typically moves in the opposite direction from interest rates, which can adversely affect its performance.

Consider the issuer

Bonds are available from many types of issuers, including corporations, the U.S. Treasury, local and state governments, governmental agencies, and foreign governments. Each type is taxed differently. For example, the income from Treasury securities (unlike corporate bonds) is exempt from state and local taxes but not from federal taxes.

Bonds issued by state and local governments, commonly called municipal bonds or munis, are just the opposite. Often a staple for retirees in a high tax bracket, munis generally are exempt from federal income tax (though specific issues may be taxable), but may be subject to state or local taxes and the alternative minimum tax. Largely because of that tax advantage, a tax-free bond typically yields less than a corporate bond with the same maturity. You’ll need to compare a muni’s tax-equivalent yield to know whether it makes sense on an after-tax basis.

Think about bond maturities

Bond prices can drop when interest rates and/or inflation rise, because their fixed income will buy less over time. Inflation affects prices of long-term bonds–those with maturities of 10 or more years–the most. One way to keep a bond portfolio flexible is to use so-called laddering: buying bonds with various maturities. As each matures, its proceeds can be reinvested. If bond yields are up, you benefit from higher rates; if yields are down, you have the option of choosing a different maturity or investment.

Certificates of deposit/savings accounts

Certificates of deposit (CDs), which offer a fixed interest rate for a specific time period, usually pay higher interest than a regular savings account, and you typically can have interest paid at regularly scheduled intervals. A CD can be rolled over to a new CD or another investment when it matures, though you may not get the same interest rate, and you’ll pay a penalty if you cash it in early. A high-yield savings account also pays interest, and, like a CD, is FDIC insured up to $250,000.

Stocks offering dividends

Dividend-paying stocks, as well as mutual funds and ETFs that invest in them, also can provide income. Because dividends on common stock are subject to the company’s performance and a decision by its board of directors each quarter, they may not be as predictable as income from a bond.

However, dividends on preferred stock are different; the rate is fixed and they’re paid before any dividend is available for common stockholders. That fixed payment means that prices of preferred stocks tend to behave somewhat like bonds. Preferred shares usually pay a higher dividend rate than common shares, and though most preferred stockholders do not have voting rights, their claims on the company’s assets will be satisfied before those of common stockholders if the company has financial difficulties. However, a company is often permitted to call in preferred shares at a predetermined future date, and preferred stockholders do not participate in a company’s growth as fully as common shareholders would.

Pass-through securities/REITs

Some investments are designed to act as a conduit for income from underlying assets. For example, mortgage-related securities represent an ownership interest in mortgage loans made by financial institutions. The most basic of these, known as pass-throughs, represent a direct ownership interest in a trust that consists of a pool of mortgages. Examples of pass-throughs include securities issued by the Government National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Federal National Mortgage Association.

Certain types of investment trusts–for example, REITs that buy, develop, manage, or sell real estate–don’t owe taxes as long as they pay out at least 90% of their net income to investors. That payout has traditionally made them popular as an income vehicle and portfolio diversifier (though diversification alone does not guarantee a profit or protect against a loss). There are many types of REITs, so be sure you understand how the one you choose functions before investing.

Automated inflation fighting

Some investments are designed to fight inflation for you. Treasury Inflation-Protected Securities (TIPS) pay a slightly lower fixed interest rate than regular Treasuries. However, your principal is automatically adjusted twice a year to match changes in the Consumer Price Index (CPI). Those adjusted amounts are used to calculate your interest payments.

The inflation adjustment means that if you hold a TIPS until it matures, your repaid principal will likely be higher than when you bought it (the government guarantees it will not be less). However, you can still lose money if you sell a TIPS before maturity. Inflation rates change, and other interest rates can affect the value of a TIPS. If inflation is lower than expected, the total return on a TIPS could actually be less than that of a comparable non-indexed Treasury. Also, federal taxes on the interest and increases in your principal are owed yearly even though additions to principal aren’t paid until a TIPS matures. Inflation-linked CDs function much like TIPS, but you’ll generally owe federal, state, and local taxes each year.

Some mutual funds are managed with an eye toward inflation. A mutual fund that invests in inflation-protected securities pays out not only the interest but also any annual inflation adjustments, which are taxable each year as short-term capital gains. Some funds target inflation by mixing TIPS with floating rate loans, commodity-linked notes, real estate-related investments, stocks, and bonds.

Distribution funds

Some mutual funds are designed to provide an income stream from year to year. Available as part of a series, each fund designates a percentage of your assets to be distributed each year as scheduled payments, usually monthly or quarterly. Some funds are designed to last over a specific time period and plan to distribute all your assets by the end of that time; others focus on capital preservation, make payments only from earnings, and have no end date. You may withdraw money at any time from a distribution fund; however, that may reduce future returns. Also, payments may vary, and there is no guarantee a fund will achieve the desired return.

Many choices

New ways to help you translate savings into income are constantly being created. These are only a few of the many possibilities, and there’s more to understand about each.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Albert Aizin, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, Merck, ExxonMobil,access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, , Glaxosmithkline, , Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Albert Aizin is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

Immediate Annuities Can Provide Lifetime Income

Running out of income is a primary concern for most retirees. Immediate annuities offer a financial alternative to help meet retirement income needs by providing a steady stream of income designed to last through retirement.

What is an immediate annuity?

An immediate annuity is a contract between you and an annuity issuer (an insurance company) to which you pay a single lump sum of money in exchange for the issuer’s promise to make payments to you for a fixed period of time or for the rest of your life. Immediate annuities may appeal to you if you are looking for an income you cannot outlive.

Characteristics of immediate Annuities

  • A steady stream of payments for either a fixed period of time (such as 10 years) or for the rest of your life.
  • The issuer assumes all investment risk.
  • Generally, you pay ordinary income taxes on the part of each payment that represents earnings or interest credited to your account. The remaining portion is considered a return of your investment and is not subject to taxation.
  • You relinquish control over the money you invest in the immediate annuity. While there are some exceptions, usually you receive fixed payments with little or no variation in the amount or timing of each payment.
  • If you chose a life only payment option, you may not live long enough to receive the return of all of your investment, since payments cease at your death with this option.

How does an immediate annuity work?

As the name implies, an immediate annuity begins to pay you a stream of income immediately. The amount of income you receive is based on a number of factors, including your age at the time of purchase, your gender, whether payments will be made to only you or to you and another person, and whether payments will be made for a fixed period of time or for the rest of your life.

What are your payment options?

Most immediate annuities include a number of payment options that can affect the amount of the payment you receive. The more common payment choices are:

  • Life only. Payments are based on your age. Payments continue until you die, at which time they cease.
  • Installment refund/cash refund. If you die prior to receiving at least the return of your investment in the immediate annuity, the beneficiary you name in the policy will receive an amount equal to the difference between what you invested and what you received. The beneficiary will receive this amount in either a lump sum (cash refund) or payments (installment refund).
  • Life with a period certain. With this option, the issuer does not guarantee the return of your investment; rather, it guarantees a minimum period of time during which payments will be made. Payments are made for the rest of your life, but if you die prior to the end of a minimum payment period (usually between 5 and 25 years), the payments will continue to be made to your beneficiary for the remainder of the period, but no longer.
  • Joint and survivor. This option provides payments for the lives of two people, typically you and your spouse. When either of you dies, payments continue to be made for the life of the survivor. You can elect to have these “survivor” payments remain the same, or be reduced to a percentage of the original payment, such as two-thirds. The joint and survivor option can also be added to the life with period certain option. In this case, the issuer will make payments until both of you have died orfor the period of time you selected, whichever is longer.
  • Period certain. This option provides a guaranteed payment for the fixed period of time you specify (e.g., 5, 10, 15, 20 years). If you die prior to the end of the chosen period, your beneficiary will continue to receive payments for the remainder of the fixed period.

The payment option selected affects the amount of each payment. For example, life only payments will be larger than payments for life with a period certain. But life with a period certain payments will be less than payments for a fixed period certain.

Example: A 60-year-old man who invests $100,000 in an immediate annuity may receive annual payments of $7,260 for the rest of his life, or $6,696 per year for life with a minimum of 20 years, or $7,920 per year if he chooses payments for a fixed period of 20 years. (This example is for illustration purposes only and does not reflect actual insurance products or performance, nor is it intended to promote a specific company or product.)

Other factors to consider

An immediate annuity can offer a measure of relief from retirement income concerns by providing a dependable payment for the rest of your life. However, as with most investments, there are other factors to consider before deciding if investing in an immediate annuity is the right choice for you.

First, be sure that the payment option you select will address your income needs. For instance, if you are in poor health and have others who depend on you for financial support, selecting a life only payment option may not be appropriate because payments stop at your death, removing a valuable source of income from your survivors. Second, if you are considering a life only payment option, be aware that it may take many years before you receive at least the return of your investment from the immediate annuity. A 70-year-old man who invests $100,000 and selects a life only option (generating annual payments of $7,260) will have to live about 14 years to receive the return of his $100,000.

Third, consider whether there are better alternatives for providing income. For example, it’s possible that the interest or dividend from investments such as bonds and dividend-producing stock could produce more income than you could get from an immediate annuity over the same period of time based on the same investment amount. In addition, these types of investments usually are more liquid than immediate annuities, giving you the opportunity to increase your withdrawals if you need more money. On the other hand, an immediate annuity provides a guaranteed stream of income regardless of changing interest rates or investment returns. Of course, guarantees are subject to the claims-paying ability of the annuity issuer.

Should you consider an immediate annuity?

An immediate annuity can be a useful financial tool. You may want to consider the purchase of an immediate annuity if:

  • You want a stream of income you cannot outlive.
  • You have a sum of money that you would like to turn into a regular source of income and you aren’t interested in leaving the money to your heirs. If you want to leave a portion of the money as a legacy, an immediate annuity may not be a good choice.
  • You are uncomfortable with investments that have a significant risk of loss. If subjecting your money to the risk of loss associated with investing in securities does not appeal to you, an immediate annuity may provide a way to transfer that risk to an insurance company. While the income guaranteed by the immediate annuity is subject to the claims-paying ability of the annuity issuer, the immediate annuity payments are not subject to stock market risk.
  • You expect to live for a long time. If you’re healthy and have longevity in your family, an immediate annuity may be an investment to consider.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Albert Aizin, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by Alcatel-Lucent, Bank of America, fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Albert Aizin is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.