Frequently Asked Questions Regarding Rollovers from Qualified Plans: 401(k)s Pension Plans SEP IRA's Simple IRA's Profit-Sharing Part 1: How to Avoid Tax Penalties Part 2: Where to House Your Rollover IRA Part 1: How to Avoid Tax Penalties Why do I have to worry about my retirement plans if I change jobs or employers? If you are under 55 years old and you leave your employer, you have to treat your retirement plans carefully to avoid paying hefty (and unnecessary) tax penalties. Your retirement plan money has tax-deferred status (you don't have to pay taxes on the money until you withdraw it at retirement), which helps it grow faster - but in return the IRS has strict rules about what you can do with it before you reach retirement age. What are my options regarding my retirement plan assets? Leave it in the plan of your former employer Take the money in cash Do a direct (trustee-to-trustee) rollover into your new employer's qualified plan Do a direct ("trustee-to-trustee") rollover into an IRA (Individual Retirement Account) Why shouldn't I take the cash now? The most tempting choice is to take the money. "I'm still young," you think. "There's plenty of time to replace the money in my retirement plans." Don't do it! If you take money out of your retirement plans before the age of 55, you may have to pay a 10 percent penalty on top of federal, state, and in some cases, local taxes. What's more, the government will help itself to 20 percent of your withdrawal as an advance on your tax bill. In other words, if you cash out of a retirement plan worth $56,000, you could pay a penalty of $5,600 plus, say, 27 percent in federal income tax (20 percent of which is withheld from the distribution). Your $56,000 has turned into $35,280. And that doesn't include any state and local taxes you may owe. How can I avoid paying a penalty on my retirement plan assets if I change jobs or employers? To avoid paying taxes or a penalty on your retirement plan money you need to either: Leave it in the retirement plan of your former employer, or Do a direct ("trustee-to-trustee") rollover into your new employer's retirement plan (if they accept them) or an IRA. Why would I want to leave it with my former employer? There are several possible reasons: 1. You might think your former employer's plan has better investment choices than your new employer's plan. 2. You might need some time to decide what to do with the money. 3. Your new employer might not allow you to roll over your account until you meet the eligibility requirement for participating in the new 401(k) plan (you might need to work at the company for a certain period of time before becoming eligible to participate in the plan). 4. Your new employer might not offer a 401(k) plan or allow pension plan rollovers. You must have at least $5,000 in your account in order to leave it with your former employer; also, you can no longer contribute to the account, but you can continue to monitor your portfolio. What is a direct rollover, and under what circumstances should I do that? If you want the account to keep its tax-deferred status, but you do not want to leave your money in your former employer's plan, your best option is to do a "trustee-to-trustee" or "direct" rollover. In this case, you would arrange for the money to be transferred directly from your old account into a rollover IRA, without passing through your hands. This is important when it comes to tax liability, as we'll see below. Can I roll over the whole amount? You can only roll over your pre-tax contributions. If you have made after-tax contributions, you will have to take those in cash. (Remember that you have already paid income tax on them so there is no penalty or tax due.) You can roll over the interest you earned on your after-tax contributions, however. (Note: the IRS changed the rules regarding "after-tax" contributions being rolled over after 2001. Please consult an investment advisor or tax professional for current rules.) Also, if you have an outstanding loan on your 401(k) account you will have to pay it all back before you leave your job. If you don't, the loan amount will be treated as an early distribution and you will have to pay federal, state and local taxes. You may also be subject to a 10% early distribution penalty if you're under age 55. How do I arrange for a direct rollover into my new employer's 401(k) plan? You should contact the HR or benefits office at both your old and new companies and tell them what you want to do. Can I roll my account over into a Roth IRA? No, you have to roll it into a traditional IRA. This is because the rules for contributing to Roth IRAs are different than for 401(k) plans and traditional IRAs. I'm not sure what I want to do yet. Can I have the check made out to me and hold on to the money while I decide? You can, but you have to roll it over (a "regular" rollover) within 60 days or you will lose a good chunk of your money. If you have the check made out to you: Your employer will withhold 20% of the amount for the IRS. So, if you have $20,000 in your account, you will get a check for $16,000. You will only get the $4,000 back after you file your tax return, and then, only if you have actually rolled the money over into a new tax-deferred account within 60 days. If you don't make the deposit within 60 days, the IRS will charge you a 10% penalty on the full amount (if you are under age 55), plus you will have to pay federal, state and local taxes on the full amount. So the IRS will keep that 20% withholding, and then some (according to a recent survey by the Challenger, Gray and Christmas employment consulting firm, people have been losing up to 50% of their account money in this way). If you make the regular rollover within 60 days, you also have to deposit the 20% that was withheld ($4,000 in the above example) out of your own pocket. Otherwise that amount will be treated like an early distribution by the IRS (subject to penalties and taxes). It all seems so complicated. What if I need more time to think about what to do? Changing companies creates upheaval, and some things can get lost in the shuffle. It is in your interest to make sure that your retirement plan isn't one of them. If you're really not sure what to do, consider leaving the account with your former employer until you have time to examine all your options. If leaving it with your former employer is not possible, then you should make the time to find a suitable location to open a rollover IRA. Part 2: Where to House Your Rollover IRA Where's the best place to open a rollover IRA account? There are many options available and you will need to do some research. Choosing a financial institution is like choosing a doctor. Everyone has different needs. Here are some questions you should ask yourself to help you evaluate your needs. 1. Do you want advice on how to invest, or do you enjoy researching and choosing your own funds? 2. Do you want to trade online, or would you prefer to carry out your transactions in a local office, or by phone? 3. Do you want around-the-clock access to your account (by telephone or Internet)? 4. Do you want extensive customer service (such as human beings answering the phone when you call) or would you rather pay lower fees and forego the service? Once you've answered those questions, take a look at the different categories of brokers and financial institutions, and what they offer: A full-service brokerage such as Merrill Lynch, PaineWebber, Salomon Smith Barney, A.G. Edwards and others will generally offer the widest variety of investment choices and services (such as personalized investment advice), but charge relatively high fees and commissions. Some full-service brokers are looking into offering online trading, but on the whole these brokers are geared toward investors who require personal contact and wood-paneled offices. Mutual fund companies generally offer their own array of funds. Some also offer access to trading in stocks and extensive mutual fund menus from other fund companies, but most do not offer individual stocks or bonds, or online trading. Many will offer investment advice, for a fee. A bank or other financial institution (like a credit union or insurance company) will also likely offer selected services and funds (possibly including investment advice). But if you have a good relationship with your bank or financial institution and you like "one-stop shopping," this might be your preferred option. Registered investment advisors, like Agri-Invest, will help you select mutual funds for your rollover IRA account. A fee-only advisor is compensated by fees paid by you, and do not receive commissions on the funds that they recommend. This option would be best for someone who would like independent and objective advice regarding their retirement funds, or wants someone to help manage their retirement assets. I've narrowed down my choices, now what should I do? Once you've narrowed down the type of institution you prefer, you should do some sleuthing to compare fees and services at several of your top choices. Every financial institution and advisor is compensated by the client for services provided. Be sure you know how you are paying. Deferred sales charges and 12B-1 fees are not always well understood. What are the "account" fees (such as set up fees, termination fees, annual maintenance fees or fund transfer fees). Compare commissions or fees charged by individual funds within the account. Get a direct answer regarding what fees will be charged, what commission will the salesman get and what the impact is on your money. If I choose to work with a professional advisor or financial planner, what questions should I ask? 1. What is your educational background? 2. How long have you been offering financial planning services? 3. Will you provide me with references from clients? 4. Have you ever been cited by a professional or regulatory governing body for disciplinary reasons? 5. Do you provide a written analysis of my financial situation and recommendations? 6. Does your financial planning service include recommendations for specific investments or investment products? Do you offer assistance with implementation? 7. Do you take possession of, or have access to my assets? 8. How is your firm compensated? _____ Fee Only _____ Commission Only _____ Fee and Commissions 9. If you earn commissions, approximately what percentage of your firm's commission income comes from: _____ % Insurance products _____ % Annuities _____ % Mutual funds _____ % Limited partnerships _____ % Stocks and bonds

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