After you retire, you can leave your money in your current 401 or 457 plan. You don’t have to start withdrawals until the year that you reach age 70 1/2. You can, if you wish, roll your plans into an IRA and from there, you can roll them into a Roth IRA if you don’t exceed certain income restrictions.
If you decide to roll your funds into an IRA, keep in mind that you now follow the IRA rules, not the 401 or 457 rules. For example, you can withdraw your funds as you need them, after retirement, without waiting until you turn 59 1/2, but if you roll your funds over to an IRA, you will have to wait till 59 1/2 or pay a 10% penalty. Also, you don’t get those handy information packets every quarter. It will may cost you more to manage the account in a private plan vs. the Savings Plus program.
If you plan to roll your 401 or 457 over into qualified plan such as a IRA, you will need to go to the Savings Plus to obtain a form called the Benefit Payment Application. If you have both a 401 and a 457, you will be filling out an application for each plan.
One of the things you will find if you do any reading on the subject of the relative value of regular IRA accounts vs. Roth IRA accounts, is that you will pay more in taxes when you withdraw from the regular IRA, or your existing Savings Plus plan, than you will from a Roth IRA unless you are in a lower tax bracket when you withdraw the funds.
Before you make any changes or start any transfers, make sure that you qualify to convert to a Roth IRA before going to all the trouble. If you decide to move forward, you have to create your new IRA with your local provider, transfer the funds from Savings Plus to your new IRA using the forms required by the Savings Plus program, then convert the regular IRA to a Roth IRA and deal with the tax consequences of the conversion.
I have done the calculations and guess what; since you have such a great retirement program, and since you probably will not be in a lower tax bracket when you decide to start drawing your deferred comp, you will pay more in taxes when you take withdraw the money. But, guess what, your net proceeds after taxes may be approximately the same either way. The most important issue is that those funds grow tax deferred in the interim.
If you really want to see the difference between the two scenarios, here is how to do it. You will need access to Excel or some spreadsheet program and access to the internet. First of all, open Excel so that you have a blank spreadsheet on the screen. Now open your internet explorer so that you are ready to go.
For the purposes of this discussion, we will assume that, you have accumulated $300,000 in your accounts by the time you retire. Also, let’s assume that you are in the 33% tax bracket for combined state and federal income taxes. If you leave the $300,000 in your 457 and/or 401 accounts you can expect to pay 33% in income tax when you withdraw your money. If, on the other hand, you move the funds from your 457 and/or 401 to a Roth IRA, you will give up 33% ($100,000 in income taxes) when you make the move, unless you have an extra $100,000 laying around doing nothing. Unless you have that $100,000, you will end up with $200,000 in a Roth.
Now, let’s be clear for this discussion, you either have a total of $300,000 in your 457 and/or 401, or you have $200,000 in a Roth. The program we will use will calculate the minimum distributions from either situation based on the law, the year you turn 70 1/2 and continuing until you are about 100 years of age.
There are several sites where you can do the calculation online. You
Go online to the AARP website to find an online calculator or try this one from SmartAsset.com or this one from Charles Schwab. Of course, the above considerations are not the only considerations to worry about. These plans are great for you and they are great for passing what is left to your spouse, but they really are losers when it is time to transfer the assets to your children. In fact, you can tell your kids right now that they can expect to inherit only about 25% to 30% of what is left when you and your spouse are gone. Yes, the tax man takes the rest.
You are probably asking why the heck you even read this page because it looks so bleak when it comes to the “Transfer Stage” the stage when everything transfers to the next generation. Well, there are other options to consider. I can say that I did not know about all of these when I was working, but have been doing some homework of late, and I am considering making some changes so that there is something left for my kids to inherit.
I have been reading the books, “Missed Fortune” and “Missed Fortune 101” by Douglas R. Andrew. You can find the books at Borders or Barnes & Noble. Cheaper at Barnes & Noble. You can also find the book on Douglas Andrew’s website, www.MissedFortune.com.