Stay out of the penalty box
Q: I plan to accept a buyout offer from my employer, and I’m leaning toward rolling my 401(k) account into an IRA. I don’t see any drawbacks, or am I missing something?
A: In many instances, a rollover makes sense — you can invest your money anywhere you want, and you may have more flexibility when it comes time to take out money (some 401(k) plans limit the number of withdrawals you can take). But if you’re younger than 59 1⁄ and think
2 there’s any chance you’ll need money from your savings to pay for living expenses, you should leave your money in your 401(k) or other employer-provided plan.
Here’s why: When you take a withdrawal from a traditional IRA before age 59 1⁄2, you’ll usually pay a 10% early withdrawal penalty. But if you leave your job at age 55 or older, you can take withdrawals from your former employer’s 401(k) plan penalty-free. You’ll still owe taxes on the money, but you’ll avoid the 10% haircut.
You can use this strategy to avoid early withdrawal penalties on a lumpsum buyout, too, says Tom McCarthy, a certified financial planner in Marysville, Ohio. Instead of rolling the buyout into an IRA, ask your employer if you can roll that money into your company’s 401(k) plan. Once the money is in your plan, you can take penalty-free withdrawals as early as age 55.
Workers who are older than 59 1⁄
2 don’t have to worry about the 10% early withdrawal penalty, but you still want to avoid a tax hit on your lump-sum payment. Make sure you instruct your employer to roll the money directly into an IRA so you can defer taxes until you start taking withdrawals.
Q: My wife has not worked and has no Social Security benefits of her own; she will be 62 soon. I am retired and receiving Social Security benefits now. When can my wife receive her benefits and how much will she get?
A: Your wife can receive benefits beginning at age 62. If she does, she will be claiming her benefit early, and she will only get about 33.5% of your full retirement age benefit, says Jim Blair, a former district manager for
Social Security’s Piqua, Ohio, office and currently a co-owner of Premier Social Security Consulting in Cincinnati. If she waits a few more years until her full retirement age, she will get the maximum spouse’s benefit, which is 50% of your benefit at your full retirement age. The benefit she receives is unaffected by when you claimed Social Security.
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