By Patrick Duffy
I have some money in a 401(k) plan and expect to move back to live in Ireland before the end of the year. What are my options with the plan money? – FAQ, Manhattan
You have many options. But before answering your question, let me say, as I often say to people, keep the tax aspect in perspective. Do not let the tax tail wag the dog. Other aspects may be more important.
(a) You could leave it where it is. However, this is an unlikely solution since most plan trustees want you to take your money with you when you leave a company.
(b) You could take the money, pay the taxes (penalty plus income tax) when you file your 1998 tax return, and run. You can now do what you like with the money. Invest it anew wherever and in whatever you like. Buy a house with it, take a vacation etc.
(c) You could roll it over to an IRA, a traditional IRA. In this case, you pay no taxes, the money is still yours and still earmarked for retirement. Remember, retirement will probably be long in terms of years and, therefore, more expensive, no matter where you live. Now the IRA is fully under your control from the point of view of picking your own investments. and, by the way, this IRA money cannot be invested outside the USA. When the time comes, you can begin to take distributions at age 59 1/2. You must begin to take distributions at 70 1/2.
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(d) Having rolled it over to a traditional IRA, you might consider rolling it over to the new Roth IRA. If you do so in 1998, you have four years in which to pay the extra taxes. Though unclear at the moment, the consensus is that one fourth of the amount you roll over will be put on your tax return for the next four years. This point is expected to be clarified soon. Once rolled over to a Roth IRA, you have full control over the choice of investments, you do not have to begin taking it out at age 70 1/2, and you pay no taxes on the money when you do.
Be aware before rolling the money over to a Roth IRA that there is an income threshold which may make you ineligible to roll it over.
Also, be aware that once you roll the money over to a Roth IRA it must be left invested for at least five years or until you reach 59 1/2. If taken out within the five-year time span, a 10 percent penalty applies. Another plus for a Roth IRA, you can take $10,000 out of a Roth IRA for a first-time purchase of a house and pay no 10 percent penalty.
Should you decide to roll the money over to either a traditional or a Roth IRA, one thing should not be forgotten: You are responsible for the performance of the investment. It is amazing how many people invest money in retirement plans and pay little attention to how it is doing. Since the money will presumably be invested for many years, it is critical to monitor the performance. Otherwise, your retirement may be a little less enjoyable than you would like.
(e) You could decide to “split” the options i.e. take some of the money with you and roll over the rest.
Whatever the solution you come up with, think it through. You only have one opportunity.
Patrick J. Duffy MS. CFP is a certified financial planner practicing in New York City. He specializes in business and personal financial planning with the overall aim of enhancing an individual’s or family’s quality of life. His office is at 767 Lexington Ave., New York, N.Y. 10021 and he can be reached by telephone at (212) 755-7736.
If you have any questions related to business or personal finance, mail or fax it to the Business Section, Irish Echo, 309 Fifth Ave., New York, NY 10016; (212) 686-1756. The Echo cannot guarantee it will publish every question it receives.