As Bob Belvry and his wife, Marilyn Berner, prepared for retirement over the past year, they needed advice about how best to invest some $400,000 they had accumulated in a hodgepodge of deferred compensation, 401(k), and individual retirement accounts. After fruitless attempts to get personal attention from Fidelity Investments, which held much of the money, the Key West (Fla.) couple took a friend's advice and turned to a broker from Raymond James Financial. Fidelity will not comment on specific customers.
The broker won the account by driving 15 miles to their home after work for a two-hour meeting. "We wanted to work with a human being we could actually talk to," says Berner, a psychotherapist and former chief of staff in Massachusetts' Mental Health Dept. "We wanted someone we could get quickly if we needed to," adds Belvry, a technology training specialist. The couple, who moved to Florida, consolidated their accounts in a rollover IRA and left it to the broker to suggest investments for it.
More and more people will be looking for the same sort of counsel as the leading edge of the Baby Boom generation reaches 59 1/2 this year, generally the age when retirement savings can be withdrawn without penalty. Not only does investment advice become more important -- you're no longer working, so there's less opportunity to recoup your losses -- but you face significant tax and estate planning implications related to what you do with your assets.
The big issue is whether to move the assets into a rollover IRA or keep it in the corporate 401(k) plan. Financial planners say rollovers make sense for most people. Almost $2 trillion will be rolled over from workplace plans to IRAs over the next five years, according to Financial Research, a Boston firm. The investment companies that run corporate 401(k) plans are often ill-equipped to provide the hands-on advice that many seek, so the decision to roll over is often made as part of a strategy developed with a financial planner or broker.
Perhaps the best reason to move the 401(k) to an IRA: A wider range of investment choices. Workplace plans typically offer only a dozen or so investment funds, but with an IRA at a bank or brokerage firm, you can invest in almost any kind of security. Even more options are available in self-directed IRAs, which can invest in commercial, multi-family, and vacation real estate, business start-ups, franchise opportunities, and limited partnerships. Finding a firm to administer a self-directed account can take some doing, since most banks and brokerages don't handle them and annual fees can exceed $1,000, compared with less than $100 on a traditional IRA.
Leaving money to heirs is usually easier with an IRA. If the owner of a 401(k) dies and the beneficiary is anyone other than a spouse, what happens next is largely up to employers. They decide how long beneficiaries can keep funds in the plan, and most require that the heirs liquidate the account -- generating a large tax bill. "With the income tax and the possibility of the estate tax for large accounts, you could see 70% disappear," says Annette Simon, a financial planner at Mosaic Wealth Management in Bethesda, Md. In contrast, when the owner of an IRA dies, beneficiaries can stretch out the distributions over their lifetimes, greatly reducing the tax hit.
Still, there are a few reasons to stick with the 401(k). If you take early retirement, you can tap the money without penalty starting at age 55 -- even if you continue to work at another company. IRA assets typically can't be withdrawn before age 591/2 without penalty. Another benefit: Employer-sponsored plans often have access to low-cost mutual-fund shares that aren't available to the public.
If you have appreciated company stock in a 401(k), the best bet may be to withdraw it entirely. That means you will owe income tax, but only on the amount you paid for the shares. When you eventually sell the stock, you'll owe tax on the difference between your cost and your sales price, but that profit will be at the lower capital-gains tax rate. If instead you move the stock to an IRA, you'll owe regular income tax on the entire amount.
It's complicated stuff, for sure. No wonder Belvry and Berner and millions of others are seeking some good advice.
By Aaron Pressman