403(b) distributions. What to do.

[Guest slware]

Will retire next year at 55, have a 403(b) with my school district. What are my options?

[Michael Devault]

There are three options that quickly come to mind:

1. Leave the money in the 403(b) account and let it continue to grow on an income tax deferred basis.

2. Roll the money into an IRA. Then, if you so desire and qualify, the IRA could be converted to a Roth IRA. You'll pay tax, but further growth in the Roth IRA will likely be income tax free.

3. Begin taking income distributions. This will result in the amount taken to be treated as ordinary income and, therefore, subject to income tax. But, because you're separating from service during or after the year in which you attain age 55, there will be no 10% federal income tax penalty.

I'm sure that others will offer some other suggestions, but I hope these are of some benefit to you.

[Guest Yanikoski]

You may also have the option of converting your account to a guaranteed lifetime income, if your funds are invested in an annuity product. Your insurance person can quote your choices along these lines.

If you would like to see a hypothetical side-by-side comparison of some of these options, you can try out the web-based calculator on our website at no charge. Go to http://www.stillriverretire.com/LumpSum/SR...asp?UserID=1276 We don't guarantee results, but it's something that might be worth trying.

What this comparison generally shows is that keeping the tax shelter going is usually your best option (although the lifetime annuity can make more sense when you get older).

If you are retiring, though, you really need to make this decision in combination with other decisions you are making at retirement, such as what you should do with your state retirement plan, when you should start taking Social Security (if you are eligible for it), what you should do about your house (if you own one), whether you should be cutting back -- or increasing -- your expenses, what you should do with other assets that you own, what you should do about meeting medical and long-term care costs that you may face later in your retirement, what your spouse (if you are married) should be doing about some of these same issues or different ones that might affect him/her, etc., etc., etc. Unfortunately, there aren't any tools out there that will enable you, or even a professional adviser, to do a good job of this kind of analysis. We are working on something like that right now, but it won't be available until next spring, at the earliest. Meanwhile, probably the best you can do is look at each decision independently and hope that the interractions among them don't cause too many surprises.

Best of luck !

[joel]

Please recognize that annuitizing means you are signing over your title to your money to the insurance carrier in return for a guaranteed lifetime income. All payments stop upon your death should you choose the single life option. This option provides the highest income available because it guarantees lifetime income for just one person, you. Should you want to guarantee a continuation of income to a significant other you will need to take a cut in your income because the insurer is now guarateeing income for two lives, not one. Carpenters have the saying: measure twice cut once. I would recommend that when it comes to lifetime annuitizing you measure at least 10 times before you make this IRREVOCABLE DECISION.

You need not decide on a payout sheme until your Required Beginning Date which is April 1 of the year following the year you turn 70-1/2.

Peace and Hope,

Joel L. Frank

[GBurns]

slware

What does retiring have to do with your 403(b)? Did someone tell you that there is some connection? If so What?

Apparently there was something that someone told you that caused your question. If you tell us maybe someone can explain to you.

[Guest slware]

I was just checking options. I don't think I want it locked up in an IRA until 59 1/2. In case I want (or need) to tap it sooner. Can it be tapped into at any time if I leave it in the 403(b)? Since I managed to get our district to let us go with Vanguard, I am also not big on annuities. I want the most flexibility.

By the way, I will be getting pension income and regular pay next year, which could make income taxes a fright. I am maxed out on the 403(b) and a Roth, are there any other vehicles I could use to shelter more?

[joel]

I was just checking options. I don't think I want it locked up in an IRA until 59 1/2. In case I want (or need) to tap it sooner. Can it be tapped into at any time if I leave it in the 403(b)? Since I managed to get our district to let us go with Vanguard, I am also not big on annuities. I want the most flexibility.

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Siware,

May I suggest you read once again Michael Devault's post; specifically item 3 which refers to taking withdrawals from the 403(b) at age 55.

Peace and Hope,

Joel L. Frank

[GBurns]

I would not let taxes be a major concern. Higher earnings usually means not only more taxes but also more net after taxes. As long as you make more you are ahead of the game.

You are still very young so I doubt that you will be retiring from the workforce. So getting pension along with earnings from some source will be a continuing problem that many people wish they also had.

I suggest that you shop around for a competent financial planner. Be aware that not all planners have the same expertise. The vast majority specialize in asset accumulation and very few in distribution planning. However, in your case you need BOTH. Select carefully and do not get swayed by the alphabet soup of qualifications that you will see. Most mean nothing anyhow. And do not get hung up on fee only versus commission. Neither the qualification nor the cost guarantees competence.

And since you have the time, do some research and seek referrals from those who have gone before you.

[joel]

Vanguard is ideal for your 403(b). They have a great website. Have you used it in the past? Going forward I would place all of your 403(b)s with Vanguard and if you need or desire advice retain the services of a planner that charges on an hourly fee basis. If you need to make a withdrawal prior to age 59-1/2 you will not be hit with the 10 percent penalty tax as you would be if you rolled over the 403b to an IRA.

Peace and Hope,

Joel L. Frank

[Guest slware]

Thanks to all for responding.

I have now been informed that if I keep it in my 403b and want to take anything out before 59 1/2 that it must be in SEPP's. I can not take what I want when I want?

[Michael Devault]

I contend that you're received inaccurate advice. If you sever your employment during or after the year in which you reach age 55, as you said you plan to do, the law allows you access to your money.

And, there is no 10% federal penalty if you receive a portion of your money. Refer to Internal Revenue Code section 72(t)(2)(A)(v). This section specifically exempts distributions that are received after separation from service after attainment of age 55.

Any distribution that you receive will be subject to a mandatory 20% federal withholding because the distribution would be eligible for rollover to an IRA or another plan. But, since the distribution would be includible in your gross income if you decide to keep it and spend it, that shouldn't be too much of a burden. It's just like withholding from your paycheck... you prepay your taxes and settle up with Uncle Sam on April 15.

So, absent any restrictions that the plan imposes, you should be able to take distributions, after you retire, without any penalty.

Hope this helps. Good luck to you.

[joel]

slware:

Please get back to us and tell us how your 403(b) provider answered you after you told him/her that you may take withdrawals as often as you like and in any amount you like without the 10 percent penalty tax if you sever employment in or after the year you turn age 55. You may want to arm yourself with a copy of Internal Revenue Code section 72(t)(2)(A)(v) and tell him/her they will be in violation of the Code if they compel you to establish a SEPP in order to be exempt from the 10 percent penalty tax.

We look forward to your reply.

Joel

[Guest slware]

Where does one get a copy of said Sec.?

[GBurns]

This is the IRC section:

http://assembler.law.cornell.edu/uscode/ht...72----000-.html

But these items from a Google search should serve you better:

http://www.irs.gov/retirement/article/0,,id=103045,00.html

http://www.nylim.com/rcg/0,2058,70_1020084,00.html

http://www.brentmark.com/periodic.htm

[Guest slware]

Thank you.