Retirement Words You Need to Know

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Avoid the Tax Bite

If you have a 401(k), there's a good chance you'll want to annuitize some of the money in the account when you stop working. But first, although some plans allow you to buy annuities within the account, you'll probably want to remove the funds from the 401(k) and put them into another account where you have more control and broader investment choice.

That leads us to another linguistic challenge—"qualified rollover." John Gugle, a financial planner in Charlotte, N.C., warns of the following pitfall: If you ask your plan administrator for a rollover, you may simply receive a check to deposit in an IRA or other account. If you do this, you will immediately owe income tax on all the money taken from the 401(k). But if you ask for a "qualified rollover" or "trustee-to-trustee transfer," the money will flow—untaxed—into a traditional IRA. Taxes will not come due until you withdraw it—presumably not all at once—from the IRA.

Also, if your 401(k) account contains employer stock, make sure you learn about a tax advantage known as NUA, or "Net Unrealized Appreciation." Jeremy Portnoff, a financial planner in Westfield, New Jersey, explains that NUA is "the difference between the purchase price of the share and the current value." Here's how you can make the most of the stock's appreciation.

Let's say you're retiring and want to roll your 401(k) account into an IRA (probably when you change jobs or retire). You bought the employer stock at one dollar per share and it's now worth ten. If you transfer the employer stock shares in-kind to a taxable brokerage account, the only tax you'll have to pay at that time will be on the original purchase price. You won't have to pay the capital gains tax on the appreciation until you actually sell the shares­a point when you'll probably be paying at long-term rates. However, if you make the transfer, cautions Portnoff, make sure you do it in the same year you roll the rest of the 401(k) into an IRA. If you wait and take the shares out of the IRA, he explains, "the tax break is lost forever."

Along with a 401(k) or similar savings account, Social Security has its own set of special terms. Consider NRA, or "Normal Retirement Age," the point when a retiree becomes eligible for a benefit of a particular size. It's really an arbitrary term. There is no one NRA for everyone. Eligibility can vary from age 65 to 67, depending on the year you were born. See this chart to figure out your own. There's nothing you can do to change this age or the formula for your benefit.

What If You Work?

But the NRA takes on importance for anyone who considers working, at least part-time, after starting to collect Social Security. This brings us to another key phrase: "Retirement Earnings Test." If you go on Social Security and continue to receive some type of salary, your benefit will be reduced by a certain amount each year if you meet the "earnings test."

Let's say you are 63 and want to go on Social Security this year. If you earn more than $13,560, your benefit will be reduced by one dollar for every two dollars you earn over that limit. Alternatively, if you were 65 now and went on Social Security later this year, your benefit would be reduced by one dollar for every three dollars you earned over $36,120 during the months before you turned 66, your normal retirement age.

The list could go on and on, with terms from the health-care field (original Medicare, Part D, etc.), from retirement living (continuing care community, etc.), pensions (QPSA), and more, but space won't allow. If you haven't yet come up with your own list, and in case you missed them, you can start your homework by reading two of my other recent columns: "Don't Let the Rules Overtax Your Retirement", which tries to demystify the term Required Minimum Distributions; and "A New Way to Manage Your Retirement Funds"), a discussion of the new 401(k) investment option known as a QDIA, or Qualified Default Investment Alternative.

Hoffman is the author of The Retirement Catch-Up Guide and Bankroll Your Future Retirement with Help from Uncle Sam. Her Your Retirement column may be found at businessweek.com/investing. You can contact her through her Web site, retirementcatchup.com.