10 Years Before RetirementTen years before your projected retirement date may seem a bit premature to increase your attention to your retirement goals, but it is a perfect time to review many of the issues you’ll be confronting upon retirement. In this section we provide you with some thought-provoking questions and tips to help you sharpen your focus on your retirement destination.
- Establish how much monthly income you'll need to retire.
- Calculate what you expect to receive from other sources (such as company pension plans, IRA accounts, savings, etc.) when you retire
- Establish what you still need to save to reach your retirement income goal
- Make regular and automatic contributions to your retirement savings plan
- Contribute the maximum—and take advantage of "catch-up" contributions
- Diversify your assets
- Keep it simple by consolidating your investments into one retirement program or institution
- Review your investments every 3–6 months
Social SecurityThe timing of your retirement will affect the amount of your monthly Social Security check: the earlier you retire, the less money you will likely receive; the later you retire, the more you will likely receive. Contact the Social Security Administration at 1-800-772-1213 and request the Retirement Benefits booklet (publication No. 05--10035) and a Personal Earnings and Benefit Estimate Statement, which will provide an individualized look at your earnings history.
Changing Jobs? Consider the Following Four Options:
- Leave your money in your former employer's plan
- Roll the money into your new employer's plan
- Move the money into a Rollover IRA
- Take a cash distribution
Your reinvestment optionsIt's important to understand the alternatives available for reinvesting your money so it continues to work for you.
1. Leave your money in your former employer's plan: If your account balance exceeds $5,000, you may elect to leave the money in your previous employer's plan.
2. Roll the money into your new employer's tax-deferred retirement plan: Your new employer may offer a tax-deferred retirement plan. Usually, you can roll your account over from your existing retirement plan directly into a new plan. Talk to the plan administrator at your new company first. Rules and investment choices vary among retirement plans, and not all plans accept rollovers.
3. Rollover IRA: Rollover IRAs are available for distributions from your employer's qualified retirement savings plan. They are also offered by many financial institutions, featuring a broad selection of investment choices. Rollover IRAs allow you to defer taxation and avoid the 10% penalty for early withdrawal if you are under age 59½. The money in your new rollover IRA will continue to earn interest which will compound tax-deferred until you begin withdrawing money during retirement. Be sure to request a trustee-to-trustee transfer or direct rollover into the Rollover IRA so that you avoid the mandatory 20% federal income tax withholding.
Rollover investment option — Annuity Contracts
Annuity contracts offered by insurance companies may pay a monthly, quarterly, semiannual or annual income benefit for the life of the recipient. In addition, some annuity contracts provide payout options that cover both the recipient and spouse for a specified period of time.
There are two types of annuities. With a Fixed Annuity the insurance company guarantees principal and pays a fixed rate of interest. A Variable Annuity, on the other hand, allows investments in securities that will offer variable rates of return.
4. Take a cash distribution: If you receive a distribution check from your former company’s plan made payable to you (this is not a direct rollover), you may still be able to roll over the funds into a Rollover IRA.
- Both types can be set up as either "deferred" or "immediate" annuities.
- The type you choose depends on whether you want to defer taking money out until you need it, or whether you're ready to begin receiving retirement payments immediately.
- Like a rollover IRA, an annuity allows you to continue enjoying tax-deferred earnings until you withdraw your money.
- Annuities may also offer additional features and benefits for which the issuing company charges additional fees.
Beware of the mandatory income tax withholding
If your distribution check is made out to you personally instead of the new plan administrator or IRA Trustee, the Federal Government requires that 20% of the total amount be withheld for taxes. If you don't re-contribute the full amount of the original distribution including the 20% withheld, within 60 days, you may be subject to ordinary income tax and, if you are not age 59½, the 10% "early withdrawal" penalty on all or part of the distribution.
Keep track of pre-tax and after-tax money
Your employer's plan may allow you to make both pre and after-tax contributions to your account. Whether you can make a direct rollover of your after-tax contributions to a new employer's plan or an IRA will depend on whether that new plan or IRA can separately account for the after-tax contributions. For tax purposes, the government needs to track the money you've paid taxes on and the money you haven't. You don't want to pay tax twice! If you have questions about what you can and cannot roll over, see your tax advisor and check first with the administrator of your new employer’s plan or IRA.
Avoid most of the problems listed above by making a direct rollover.