Financial planner David House has agreed to take questions about post-buyout monies. Each person’s situation is unique; you are urged to get professional advice before making financial decisions.
Q: I’m taking the buyout. How long do I have before I have to move or change my 401(k) money?
A: Generally, you can leave your money in the existing 401(k) plan indefinitely by rolling it into an IRA with them, but each employer plan has its own rules. You will need to check with the plan administrator for specific rules regarding termination and plan transfers or withdrawals.
Cox allows you to keep it in Vanguard if there’s more than $5000; otherwise, you must take it out in a draw. Those getting a package will hear from Vanguard within a few weeks with all the info about this. Keep in mind that if you leave it in the Vanguard 401(k), you are limited to the investment options within the plan and you will not be able to make additional deposits into your account.
This changes if you’re hired by another Cox company, according to the separation agreements, and based on a certain time period. You can then start contributing again into the plan as a Cox employee, but check the terms of your individual packet or see your benefits advisor for the correct information.
Q: Could I split it up and move it elsewhere, some into other tax-deferred places?
A: Yes, you can split it up. You would do that by rolling the 401(k) into your own personal IRA. Once it becomes an IRA, you can split it up and invest it in various places according to your own objectives. It remains tax-deferred as an IRA.
Q. At what rate would I be taxed on it if I do take it out — pre-lump-sum payout?
A: Your tax rate will be determined by your total income for 2008, including your payout, if it is received in 2008. (Your separation agreement payout is simply additional income for you in the year it is received.) If, however, you are under age 59 ½, you will also be subject to a 10 percent penalty tax in addition to your regular tax. Your tax rate will be determined based on the amount of all of your income, earned and investment, plus any amounts you withdraw from your 401(k).
Keep in mind that withdrawals from your 401(k) could change your tax bracket. Also, the plan sponsor will withhold 20 percent of your withdrawals for taxes plus the 10 percent penalty tax if you are under 59 ½.
Q: Could I put the lump-sum payout into a tax-deferred plan and take it out in ’09 so it won’t be taxed until then? This is assuming I would be in a lower bracket next year (thinking I may not have another job right away)?
A: You cannot transfer all of your lump-sum payout into a tax deferred plan. However, you can contribute the maximum to an IRA for 2008.
If you are age 49 or younger, you can contribute $5,000 to an IRA annually. If you are age 50 or over, you can contribute $6,000. In effect, this would be the same as putting $5,000 or $6,000 of your lump sum into an IRA. Additionally, you could roll over your 401(k) into this IRA account if you choose.
Q: What can I do to defer taxes otherwise? I’m going to be hit really hard in ’09, getting essentially two times the pay in ‘08.
A. Unfortunately, your options are limited. Severance pay, whether in payments or as a lump sum “bonus” are considered a continuation of wages and taxed accordingly.
As stated above, you can contribute the maximum to an IRA to defer $5,000-$6,000 of your payout. This will help reduce the tax burden of the lump sum payout. Otherwise, the only way to reduce taxes would be through qualified income tax deductions.
Note: Money paid out and designated as a “bonus” is subject to 25 percent tax withholding.
Q. My company will let me roll over the 401K into the existing plan that handles it, without a fee, etc. Is this beneficial, or should I look elsewhere? Is there a grace period for changing my mind?
A: The Cox plan, Vanguard, will roll over your 401(k) into a Vanguard IRA with no fee, but generally, there is not a fee for the rollover to an IRA with anyone.
However, some custodians will charge an annual fee for the administration of your IRA.
There is no way to predict whether it is beneficial to stay at Vanguard or go elsewhere. It is really a matter of personal preference and investment objectives. You need to shop around.
What to look for: personal investment advice you’re comfortable with, custodial fees, investment fees and charges, among other things. It is recommended you seek the advice of a professional before making these important financial decisions.
Q: What kinds of fees can I expect from other investment companies to manage my money?
A: If your account is an IRA, there may be a nominal custodial fee each year. Other investment fees can come in a variety of forms. Mutual funds can charge an up-front fee called a load, a back-end load, or a surrender charge for a number of years. Or they may have no loads at all. They will also have an ongoing management fee.
Brokerage accounts are generally associated with commissions and/or markups on the securities you purchase. Investment advisory accounts will have an annual fee based on a percentage of your account values. Some products have a commission that is paid to the broker by the issuer of the investment, and a fee is not deducted from your investment.
Since there are a variety of methods, you should have fees and charges explained in detail to you before investing. All of these items must be disclosed before you sign, and are printed in the prospectus, which you should read before investing.
Q: I escaped this round. Is there something I should be doing with my money to prepare for a layoff or buyout?
A: Save as much as possible! And if you can, contribute the maximum to your 401(k) so you can get maximum matching money from your employer, and reduce your taxable income in the event you receive a lump sum severance payout later in the year or next year.
(Email David House at dwhouse@jvbfinancial.com)
This information was provided by David W. House of JVB Financial Group, LLC in Boca Raton. David has specialized in retirement and financial planning, and operated investment and insurance firms since 1996. While information posted to this blog is believed to be accurate, no guarantees are made by David House or JVB Financial Group, LLC, and you should not rely solely on this information for important financial decisions.
This information is not an offer or solicitation for any investment, and is not individual financial or tax advice. Readers are encouraged to get professional advice as it relates to their individual financial situations.
For more information, contact:
David W. House
Senior Vice President-Advisor Solutions
JVB Financial Group, LLC
2700 N. Military Trail, Suite 200, Boca Raton, FL 33431
Direct (561) 939-1263
Fax (561) 416-9429
Cell (954) 914-2295
email: dwhouse@jvbfinancial.com
JVB Financial Group, LLC, member FINRA, SIPC