Kevin McCormally: I am Kevin McCormally of Kiplinger's, and I am here with Mary Beth Franklin, Senior Editor of Kiplinger's Personal Finance Magazine to talk about 401k's at retirement time. Mary Beth who had been encouraging people for years to save in their 401ks, a lot of people have huge balances, people are starting to retire. What happens to that money that you would been building up for retirement when you leave the job?
Mary Beth Franklin: Well, you have two choices: you can keep it there at your own employer until at least seventy-and-a-half when you have to start taking annual withdrawals or you can choose to roll it over to an IRA.
Kevin McCormally: Which you usually think is the best idea for most people?
Mary Beth Franklin: Well it depends on what you want to do with your money and when you want to do it. For example, if you are at least 55 when you leave the job and you kept your money in your 401k, you could take regular withdrawals and just pay taxes on it, no early withdrawal penalty. But if you took that same money and put it in IRA and you are younger than fifty nine-and-a-half, you can hit with a penalty.
Kevin McCormally: So 55 it can come penalty free out of the company plan but fifty nine-and-a-half before you get a --
Mary Beth Franklin: Exactly.
Kevin McCormally: In addition to the penalty question, do you have more investment options one way over the other?
Mary Beth Franklin: Certainly with an IRA you are going to have the universal stocks and mutual funds or anything else to invest in. So if you are serious about how you want to invest your money, or maybe even you might want to take a chunk of it buy an immediate annuity so you would have guaranteed income for life, you would probably want to roll it all over to an IRA.
Kevin McCormally: Mary Beth I know there is something weird going on, if you have a lot of highly appreciated company stock in that 401k when you retire; can you explain that to us?
Mary Beth Franklin: Yes, this can be a great opportunity, but you only get one chance to do it right, so you should get some professional advice.
Kevin McCormally: Okay, what's going on?
Mary Beth Franklin: You take all the money that's in your 401k and then you are going to split it. You put the company stock in a taxable account and everything else you roll over to an IRA.
Kevin McCormally: So you have got a tax free rollover of everything except the company stock and he have to pay tax on the company stock?
Mary Beth Franklin: Yes, but here is the good part. You pay tax only on the basis, the low amount of money you paid forward in the first place.
Kevin McCormally: And what happens to the appreciation while it was in the 401k?
Mary Beth Franklin: You don't have to pay tax on that until you sell it and when you do you get to pay tax at the very low capital gains rate which is currently 15%. Now just compare if you'll put all of that in the IRA every dime that comes out of the IRA including that company stock, you would be paying at your top tax rate which right now could be as high as 35%.
Kevin McCormally: That's a neat tip, thank you very much.
Transcription by:
Scribe4you Transcription Services