Current Pension Topics
Leaving Deferred Funds Alone

By JOEL L. FRANK

Q.: I just finished doing my brother's tax return. He sold off his Roth IRA for less than it cost him. The difference is about $290. Where can I get information about where to show this loss on his tax return?

P.O.

A.: You show the loss of $290 on Schedule A of Form 1040. (Job Expenses and Certain Miscellaneous Deductions). See page 63 of IRS Publication 590 at: www.irs.gov/pub/irs-pdf/p590.pdf .

Over the next month or two, the city's Deferred Compensation Plans (NYCDCP) will be launching their new Roth 401(k) Plan. For the exact date check with the Plans' Web site at http://www.irs.gov/pub/irs-pdf/p590.pdf . The plans' Dec. 31, 2005 newsletter does an excellent job of educating participants about this new program. Make it a habit to read the newsletter, which is published four times a year. The Dec. 31, 2005 issue is of particular importance to those of you who plan on retiring soon. I quote from the newsletter:

"I'm getting ready to retire ... What do I have to do?"

Actually, if you don't need the money, you don't have to do anything at all! So many participants are under the misconception that once you leave city service, you must make a decision about what to do with your Deferred Compensation Plan account. That used to be the case, but laws have changed and now participants are not required to make any withdrawal decisions unless they are at least age 70-1/2 at severance from city service.

There is another popular misconception about "what you have to do when you leave the city" and we think it may have something to do with our cousins in the private sector. Many private employers require that when an employee leaves the company, they must roll their 401(k) into an IRA. Beware the family friend or financial advisor who tells you that you must do this! Not only are you not required to roll your account into an IRA, but doing so could prove hazardous to your wealth!

What makes the 457 Plan such a wonderful thing for our younger-than-average retiree is that it does not have any early withdrawal penalties. If you withdraw your 457 account directly from the plan prior to age 59-1/2, you are liable for taxes, but not for the additional 10-percent penalty you have with 401(k)s or IRAs. You could roll over your 457 into an IRA, but here's the sticky part: if you roll your 457 into an IRA, you forfeit the ability to withdraw those assets penalty-free before age 59-1/2 ... Yikes!

Another thing you must consider is fees. There is no free lunch - you would be paying for that retail IRA and it ain't cheap! Let's assume you have a $30,000 plan account balance. The annual cost of maintaining your Deferred Compensation Plan account for one year at a total cost of 31 basis points (that includes your $50 administrative fee) would be $93. Now let's look at the median retail cost of 95 basis points for an IRA. The total cost of maintaining your $30,000 IRA account would be $285. That's over 200 percent more than Deferred Comp ... Double Yikes!!

With Deferred Compensation, you are not a single investor; you are part of a group and so you are paying fees at lower institutional rates than individual investors. This is the same principle as your health insurance; your health insurance premiums are lower because you are part of a group. If you had to purchase health insurance individually, it would be dramatically more expensive.

Summary: Once again, if you are younger than 70 years of age, you are not required to make any distribution decisions upon severance from city service. You can defer distributions until April 1st of the year following the year you turn age 70-1/2 and even then, you are not required to withdraw your account completely; you need only take the required minimum distribution amount as determined by IRS minimum distribution rules. So relax - and stick around for a while. Continue to enjoy your low-cost Deferred Compensation Plan and the freedom and the flexibility it has to offer.

Comment: Please note that if you retire prior to age 55 and withdraw money from your 401(k) account, the withdrawal is subject to the 10-percent penalty tax. If, however, you retire during or after the year you turn age 55, withdrawals from your 401(k) account are exempt from the 10-percent penalty tax. This is a reason not to rollover your 401(k) account to an IRA where pre-age 59-1/2 withdrawals are subject to the 10-percent penalty tax. For some of you, your account balance(s) might be your single largest asset. It took you decades to accumulate this wealth. I strongly urge and implore you to continue to trust the DCP to manage your money with only you in mind. I would not "stick around for a while." My advice is to leave your money with the DCP for the rest of your life. If, however, you are seriously entertaining the thought of effectuating a rollover to an IRA please contact me so we can go over the particulars together.

Mr. Frank is a fee-only Retirement Financial Planner. He can be reached by telephone at (732) 536-9472, by fax at (732) 536-7373, or via e-mail at rollover@optonline.net.