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If you play golf, most likely you have heard of the term mulligan. For you nongolfers, a mulligan is a second chance. In recreational golf, if you hit a lousy first shot, your opponents may offer you a mulligan, an opportunity to take the shot again. Most of life is full of mulligans, also called do-overs. If you have changed jobs, you have taken what I call a career mulligan. This change brings with it many important decisions, including what to do with the money you have accumulated in your firm’s retirement plan. Mulligans are scarce, however, in retirement plan decisions. If you do not understand your options or make a mistake, rarely are there do-overs, and the penalties can be severe and lifelong. But don’t despair. For the traditional 401(k)/profit-sharing plan, you have only a few options, and the advantages and disadvantages of each are easy to grasp. So, if you take a career mulligan, here are the primary options for your accumulated retirement funds. The money could remain in the pension plan of your former firm. You could move it to the plan offered by your new employer. Or, the money may be rolled into an individual retirement arrangement, either a traditional one or a rollover IRA. Of course, you can take the money as a lump sum, but don’t start spending it yet because I’m going to talk you out of this option. Each choice has advantages, disadvantages and costly pitfalls. Avoid the hazards, and you will continue to reap the benefits of tax-deferred savings well into your retirement. YOU CAN TAKE IT WITH YOU The choice with the least amount of paperwork is to leave the assets in your former firm’s retirement plan. If you are pleased with the investment choices, portfolio statements and administrative costs, this option may be your answer. For most employers, the cost of a few lingering plan participants won’t upset them. But there are a couple of points to keep in mind when considering leaving the money in the existing plan. One is that if you have a low account value, usually under $5,000, they may ask that you take it with you. You may also find that your former firm’s administrators pay far more attention to the lawyers who still work there than to you. Should you need assistance with or have questions about your plan’s assets in the future, your previous employer may not be as much help as you’d like. If your new employer’s plan has the necessary provisions to allow assets to be moved to its plan, you may want to roll your former plan’s assets over to your new employer’s. You should strongly consider this option if you believe that the new plan’s investment choices are superior or less expensive. You will, however, probably have to wait a minimum period of time before the plan will accept the rolled assets. This is not an IRS rule. Employers set these provisions to keep paperwork for revolving-door employees to a minimum. While an active plan participant, some plans allow you to borrow up to half of your vested account balance or $50,000 against your retirement assets without penalty. But be wary: Loan provisions to 401(k)/profit sharing plans are examples of financial planning situations where you don’t get mulligans. This type of loan becomes risky business when switching jobs, whether because of a voluntary or forced termination. Once you leave, most plans will not allow these loans to continue. Full payment of previously borrowed dollars must be made shortly after termination. Once you have made this payment and rolled over the assets, your new employer’s plan may allow for a new loan. Although the investment choices within either of the two 401(k)/profit-sharing plans may seem adequate, when you roll over your account to your own IRA, the world is your oyster. Your investment choices for these tax-deferred dollars increase from a small group of mutual funds in a 401(k)/profit-sharing plan to the vast realm of mutual funds, stocks, bonds, and other such instruments as CDs and treasury securities. Of course, while having the newfound flexibility and choice is valuable, the sheer number of choices can seem overwhelming. Seek some professional advice — and I don’t mean from a fortuneteller. While the vast majority of mutual funds will be at your disposal, some funds available to 401(k)/profit sharing plans are closed to investors outside of group plans. Currently, about 175 of the 11,000 existing mutual funds are closed to new investors. Realize that if your favorite fund is on this rare list, you will lose the ability to invest in it if you roll your assets to an IRA. A rollover, or conduit, IRA, is similar to a traditional IRA with one exception. The money rolled into this account should be kept “sacred” from all other IRA funds. If you follow the detailed rules to keep rollover status, you may at any point in the future roll these dollars into a new firm retirement plan. You will then regain loan provisions and, in some states, protection from creditors. MULLIGAN STEW All of these rollovers and transfers sound simple, but one mistake can be costly. When moving your assets to an IRA or to your new firm, insist that the money be sent directly to the new plan institution. Or, if the check must be sent to you, insist that it is payable to the new plan institution. This distinction has tremendous tax consequences. If you request a check made payable to you, it is taxable to you in the year distributed unless you roll it over into your new plan or an IRA within 60 days. The plan administrator must withhold income tax of 20 percent from the taxable distribution paid to you. For example, Joe Lawyer leaves his old firm and decides to roll his $200,000 401(k)/profit sharing plan to an IRA. He hasn’t read this column, and so he requests that the check is made payable to him directly. His plan withholds $40,000 (20 percent) for federal taxes. He now has 60 days to deposit $200,000 into his IRA. Well, the company sent him only $160,000. He must make up the difference or pay federal, state and county income taxes — plus a $4,000 (10 percent) penalty on the $40,000 that was considered distributed. If Joe scraped up the funds and rolled the assets in time, he will receive the $40,000 (20 percent) back when he files his next tax return, but he will forfeit the time value of this money; that is, he won’t be earning interest on the money while the government is holding it. After a while, your retirement dollars may wind up as your largest asset. It may be tempting to elect the lump-sum payment and use these dollars to pay off debt or to purchase something long yearned for. But making this move is often a mistake. Before you start spending, do the math. The funds that have accumulated with pre-tax dollars are taxable when they are distributed to you. That means federal, state, and local taxes, plus, if you are under 59 years old, a 10 percent penalty. Even when considering paying off credit card debt, the worst debt of all, paying what amounts to a penalty of 50 percent to withdraw your retirement funds is usually too high a cost. There is one exception to this early withdrawal penalty, called the 72(t) withdrawal provision. Named after its Internal Revenue Code, the provision allows you to withdraw the funds in what are termed “substantially equal payments” until reaching age 59, or five years, whichever is longer. Once an accountant or financial planner helps you determine this amount, based on your life expectancy, the withdrawals may not be missed or changed in their amounts. Once again, no do-overs here. Seek professional help in this area. If you have taken a career mulligan, you may be facing several intimidating decisions about what to do with your retirement assets. Don’t panic, but be cautious and smart. Seek help if you need it. Thankfully, life is full of mulligans. Barry Glassman is a certified financial planner and first vice president with Cassaday & Co. in McLean, Va. He specializes in assisting attorneys with individual financial planning and law firms with evaluating and implementing firmwide retirement plans. His e-mail address is [email protected] .

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