Retirement questions

[Anonymous]

Please forgive the dumb questions but I don't know anything about retirement planning, my life is paycheck to paycheck.

I received a 1099-R from a company that I used to work at that has an ESOP.  I called the company to find out what was going on, it is an early distribution, and the check is literally in the mail.  It's a partial distribution, I'll be getting the rest in a couple of years.

I have two bank accounts, one a local bank, one an online only bank.  I talked to both of them, and based on how the phone calls went I don't trust that either gave me accurate information about all my choices.

The local bank got me on the phone with one of their financial planners or retirement planners, I'm not sure which.  He told me that I could put those funds into something he called brokerage investment, but that I would only qualify for self-administered, no advice from a financial planner.  I said a few times I didn't want to do that, what other options are there, and he kept brushing off the question and telling me the various options for brokerage investment.  I finally got firm and said "So you are saying there's no other options?" and that was when he brought up IRAs, minimal information, and when the call ended some of the information was not the same as what the woman actually there with me told me about them.

When I called the online bank, the lady told me all that I could do was an IRA.  She then told me to avoid taxes I would have to mail the check to them.  I said I wasn't comfortable mailing a check in that amount to them.  I asked if I could deposit it into my local account and then transfer it.  She told me that I had to mail it, that I could write "For deposit only" and my account number on the check to make it secure, that there was no other option.  When I said that I didn't feel warm and fuzzies, that even if the funds weren't stolen someone could see the endorsement and then just drop it in the trash, I would just deal with the other bank, then she told me about something called "indirect rollover" and they could transfer it after I deposited it in the other bank.

Both cases, when I got stubborn new options appeared, so I wonder what would have been said if I knew the right questions to ask.  I don't know if there's anything other than an IRA, and I just wasn't told about it.

If an IRA is the only real option, I don't know anything about them, and there was a lot of conflicting information from the banks.  One bank said there were two types, one I could add to, one I couldn't, fixed vs. variable interest.  The guy on the phone said I couldn't withdraw in the event of an emergency, the woman in person said I could with penalties.  The other bank said there's only one type, and as far as interest it's actually playing the stock market, I have to choose how aggressive to be.  So I don't even know how it works.

Paycheck to paycheck, I absolutely must use some of it for two things that will give me the ability to get a better paying job and leave paycheck to paycheck behind, but I would like to find a retirement option that hopefully minimizes taxes for the bulk of it.

Also, my current company offers a 401k, though it's a laughable amount.  However that is tied to the company's stock, which is going downwards.  Is there any way of transferring that amount to whatever the bulk of the money will be put into?

[PersonalBanker89]

You have several options and I would advise speaking with a licensed investment professional at a brokerage firm. I use Fidelity and recomend to anyone as they have more resources than a small community bank can provide. When the bank refered to self-administered they most likely meant your account currently doesn't qualify to be managed by an investment professional so would self guide your investment stratagies (most likely current dollar amount). This isn't necessarily bad as managed accounts can be pricey and have a lot of fees for maybe worse returns or not much better upside vs self administering.

If you left the company distributions must begin no later than six years after the plan year in which you left. Distributions may be made all at once (a "lump sum") or in substantially equal payments over a period of not more than five years. So you should receive same distribution in however long it took for first first distribution.

If you put the money into a traditional (not Roth) IRA or the distribution is rolled forward into another qualified retirement plan in another company (your current employer plan), there is no tax until the money is withdrawn, when the withdrawal is taxed as ordinary income (like any other income excluding capital gains). Amounts rolled over into a Roth IRA are taxable, but are tax-free when withdrawn if that is done according to the Roth IRA rules. The stratagy of using Roth vs Traditional is you should be at a lower effective tax rate now vs when you retire.

The rollover to an IRA or another qualified plan is typically done as a direct rollover meaning the employee notifies the company that the allocation should be rolled over into the successor plan before the allocation is paid out. Alternatively, the amount can be paid out to you and you then have 60 days to roll it into an IRA.

Basically your options are an IRA (Roth or Traditional) or your current employer plan. Personally I would pick Roth IRA depending on your age and ability to go ahead and pay tax on that income. Once inside an IRA you have many investment options such as bonds, stocks, mutual funds, money market accounts, etc. I would not rollover into my employers plan because you have less investing options and typically higher fees. You can't rollover your current employer plan and can only rollover a 401k to IRA at the time you leave the company. Once inside an IRA there are early withdrawal penalties if you withdrawal before retirement age (there are situations you can avoid penalty for qualified reasons such as medical costs, college costs, 1st time home buyer etc).

I know this is a lot of information but you need to act within 60 days. Any money not rolled over in 60 days is considered a cash withdrawal subject to income tax and a 10% penalty if you are not over 59.5 years old.

Hope this helps you out. Let me know if you need anything.

[SouthJamaica]

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@Anonymous wrote:

Please forgive the dumb questions but I don't know anything about retirement planning, my life is paycheck to paycheck.

I received a 1099-R from a company that I used to work at that has an ESOP.  I called the company to find out what was going on, it is an early distribution, and the check is literally in the mail.  It's a partial distribution, I'll be getting the rest in a couple of years.

I have two bank accounts, one a local bank, one an online only bank.  I talked to both of them, and based on how the phone calls went I don't trust that either gave me accurate information about all my choices.

The local bank got me on the phone with one of their financial planners or retirement planners, I'm not sure which.  He told me that I could put those funds into something he called brokerage investment, but that I would only qualify for self-administered, no advice from a financial planner.  I said a few times I didn't want to do that, what other options are there, and he kept brushing off the question and telling me the various options for brokerage investment.  I finally got firm and said "So you are saying there's no other options?" and that was when he brought up IRAs, minimal information, and when the call ended some of the information was not the same as what the woman actually there with me told me about them.

When I called the online bank, the lady told me all that I could do was an IRA.  She then told me to avoid taxes I would have to mail the check to them.  I said I wasn't comfortable mailing a check in that amount to them.  I asked if I could deposit it into my local account and then transfer it.  She told me that I had to mail it, that I could write "For deposit only" and my account number on the check to make it secure, that there was no other option.  When I said that I didn't feel warm and fuzzies, that even if the funds weren't stolen someone could see the endorsement and then just drop it in the trash, I would just deal with the other bank, then she told me about something called "indirect rollover" and they could transfer it after I deposited it in the other bank.

Both cases, when I got stubborn new options appeared, so I wonder what would have been said if I knew the right questions to ask.  I don't know if there's anything other than an IRA, and I just wasn't told about it.

If an IRA is the only real option, I don't know anything about them, and there was a lot of conflicting information from the banks.  One bank said there were two types, one I could add to, one I couldn't, fixed vs. variable interest.  The guy on the phone said I couldn't withdraw in the event of an emergency, the woman in person said I could with penalties.  The other bank said there's only one type, and as far as interest it's actually playing the stock market, I have to choose how aggressive to be.  So I don't even know how it works.

Paycheck to paycheck, I absolutely must use some of it for two things that will give me the ability to get a better paying job and leave paycheck to paycheck behind, but I would like to find a retirement option that hopefully minimizes taxes for the bulk of it.

Also, my current company offers a 401k, though it's a laughable amount.  However that is tied to the company's stock, which is going downwards.  Is there any way of transferring that amount to whatever the bulk of the money will be put into?

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My advice would be to skip dealing with these know-nothing bank officers whose only goal in life is to sell you stuff their bank makes money on.

My advice would be to roll it over into a money market fund with a good no-load mutual fund company. You can put some or all of it in a money market fund and then, as you learn more about investing and about the fund family's options, move some of it into another fund, or not.

[Anonymous]

My device is choking on quoting South Jamaica post, but I strongly agree.

Money market account at Fidelity or Vanguard.

Bond and stock asset prices are very high.

They could go yet higher but my opinion is go with money market.

[Anonymous]

Thank you all for your advice.

I have two final questions.  First, when does the 60 days start?  The 1099-R is for 2018, but it's Feb 20th and I don't have the check yet and that's close to 60 days after the end of 2018.  Second, when I talk to other people about options, how concerned should I be if they haven't heard of an ESOP?  The woman at the second bank put me on hold until she could research what it was, but the guy at the first bank kept asking strange questions about what investment options did they give me, could I invest outside of company stock, and I told him several times that it was an ESOP.  It was like he had never heard the term but didn't want to admit he didn't know.

[Save-n-Invest]

Kami, I would avoid the local banks. My experience with them is every six months or so a new hot shot kid phones me, wastes my time and tries to convince me he can make me wealthy. Ending the call is almost impossible. My only recourse is to tell him to get a CLI on my MasterCard issued by his bank with a SP. Radio silence.

I like Fidelity. I have an IRA there. I can select the money market funds or other financal assets in the IRA. Changes in the IRA are not taxable events. It's a traditional IRA. 

[PersonalBanker89]

You have 60 days from the date you receive the distribution. The IRS may waive the 60 day rollover requirement in certain situations if you missed the deadline because of circumstances out of your control. I believe you should of received the check as it would of been distributed in 2018 but not required to mail the 1099 until Jan 31. I would call the plan and see what's going on with the distribution and when it was sent.

Any investment professional should know ESOP but they are very uncommon and can be pretty complex. What makes the ESOP distributions different is the stock part and some part of the account is usually held in privately held company stock. The company must convert this stock to cash in order to distribute unless the plan is designed a different way.

If your plan is designed as cash distribution (which seems to be the case) the cash you receive comes from selling those shares back to the ESOP before the distribution occurs. Another common form of distribution is distributing the shares to the participant and then immediately selling those shares back to the ESOP.

He might of been asking you some of those questions to better understand the plan as again it can be pretty involved.