Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: MONDAY, March 12, 1990                   TAG: 9003102254
SECTION: BUSINESS                    PAGE: A7   EDITION: METRO 
SOURCE: MAG POFF BUSINESS WRITER
DATELINE:                                 LENGTH: Medium

WHEN TO ROLL OVER

Her situation is common, and not only among retirees. Younger people who change jobs often take pension money with them.

Hudick told her she had four options, with sharply differing tax consequences, in handling her retirement money:

\ 1) Distribution this year as ordinary income.

But if she just takes the money, Hudick said, her tax bill would be $13,440 in her usual 28 percent tax bracket. She'd probably pay more because at least some of the fund would probably be taxed at 33 percent.

\ 2) Election of five-year forward income averaging. The tax due would be $6,540.

\ 3) Election of 10-year forward income averaging at 1986 income tax rates, an option open to this client. The IRS bill would be $5,531.

\ 4) Roll over the money into an Individual Retirement Account within 60 days. No taxes would be due immediately.

If the last option seems the most attractive, Hudick had an important caveat.

Anyone who deposits "qualified" pension money into a "non-qualified" IRA, he said, forever loses the option of forward income averaging.

Those words separate the two basic classes of retirement funds, Hudick said, although it matters only at withdrawal.

You can withdraw non-qualified funds, usually IRAs, only as ordinary income. You pay tax on the amount you take out each year.

Qualified plans are employers' pension, profit-sharing and 401(k) programs. The four withdrawal options apply to them.

Hudick said many retirees assume all their retirement funds are the same. "This is where large planning mistakes can be made."

Harry Schwarz, a certified public accountant with H. Schwarz & Co., warned there are exceptions to just about every rule in handling retirement plans.

Generally, however, Schwarz advises clients who change jobs before the age of 55 to roll over their pension money into an IRA.

Anyone under the age of 55 who simply takes and uses the money must pay a 10 percent penalty plus tax on the entire amount.

People over the age of 55, he said, have the option of forward averaging. This almost always reduces the tax bite.

Schwarz said people born in 1936 or later must average over five years. Those born prior to 1936 can choose between five or 10 years for income averaging.

It's almost always better to use the 10-year method, he said.

But Schwarz said the best option of all may be to roll over the lump sum into an IRA within 60 days. It should not be mingled with any other IRA.

If you roll over, he said, you pay taxes only on the amount you withdraw in any year. The rest of the money is still tax-sheltered while it earns interest.

Many people don't realize that it's possible to take money from an IRA without a penalty prior to the age of 59 1/2, Schwarz said.

Anyone below that age, he said, must take carefully structured increments based on life expectancy. Once that option is chosen, however, it cannot be changed.

Schwarz said the laws are complicated and many pension plans have complex provisions.

People who expect to receive a lump sum from a pension plan - or who have a lump sum as an option - should do some planning, Schwarz said.

A lot depends on the amount of money involved, age and other factors, he said. The only way to chose wisely is to crunch the numbers.

Hudick said that understanding tax and other consequences for distribution of a retirement plan is an important part of financial planning strategy.

Some of the factors in making an election are age, the need for income, and current and future tax brackets, Hudick said.

Once the election is made, he said, no change is permitted.

Hudick said it's important to remember that various retirement funds shouldn't be consolidated into one IRA until you explore all the other options.