Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, June 14, 1993 TAG: 9306140012
SECTION: BUSINESS PAGE: 6 EDITION: METRO
SOURCE: MAG POFF
DATELINE: LENGTH: Medium
Fixed fund paying 5.33 percent until December 1995.
Fidelity Equity Income Fund.
Scudder Growth and Income Fund.
My question is whether I should make a contribution to the 401(k) plan or, in view of the fact I would be reducing my Social Security contribution by the amount made to the 401(k) plan, I would be better off not contributing. My age is 56. I have until June 18 to let them know.
A: The decision depends to some extent on your own plans for your future.
Do you intend to retire early and draw benefits as soon as possible? Or, are you the type of person who will not start withdrawing the money until it is required by law, at the age of 70 1/2? On the other hand, you may plan to quit working at the traditional retirement age, 65.
Equally important, what is your tolerance for risk?
John C. Parrott II, a certified financial planner with Wheat First Securities in Roanoke, said history suggests that you should invest in a mutual fund instead of seeking a marginally higher benefit from Social Security. Bear in mind that Parrott represents a securities brokerage.
The mutual fund, especially a growth and income fund, should outperform anything you can accrue from the 15 percent of your salary in Social Security, he said.
However, Social Security is a sure thing, if you plan to retire early and take your benefits. The market in which a mutual fund invests might turn down just as you are ready to take early retirement.
But Parrott said you should do much better in a growth and income fund if you plan to work the next nine years to the age of 65. That will give you time to outride any downturn in the market in the interim.
Nine years is also enough time to benefit from dollar cost averaging, he said. That means you will put money into the fund when it is both high and low so that your investment will even out in the long run. You will gather extra shares when the price is low.
Parrott believes the mutual funds offer the best opportunity although there are no guarantees. "I would rather have control over my own destiny," he said.
You should not spend this money. Hold onto the funds until you retire.
You should avoid the fixed fund with its low return if you follow this course. Over time, you should do much better in the growth and income fund than in the others.
Such funds try to achieve both earnings from dividends and growth in the value of the stocks in the portfolio. They are the basic funds of the mutual fund industry.
Distribution variables
Q: I worked for CorEast Savings Bank. The bank was taken over by the Resolution Trust Corp. and now is defunct.
I had three accounts: a 401(k), a rollover IRA and a regular pension plan. These were paid out at the bank's closing. Can these three accounts be rolled into one?
A: F. Fulton Galer, a certified public account with the Roanoke firm of McLeod & Co., said that in general you can roll these distributions into one account, but it depends specifically on the attributes of each one.
Generally, Galer said, a 401(k) which moves from a trustee's account can be rolled into any qualified tax deferred account.
The IRA almost certainly can be rolled into an account.
Assuming the pension plan is a defined benefit plan, he said, any distributions can be rolled over into a qualified plan account as well.
In 1993, Galer pointed out, a 20 percent withholding tax applies to any plan distributions paid to the employee even if the amounts are rolled over. To avoid this withholding, have the plans transfer the fund directly to the new trustee.
If you are younger than age 59 1/2, Galer said, you may need to protect the ability to elect lump sum averaging on a total distribution from a qualified plan.
To preserve the ability to make this election, you may need to separate distributions eligible for lump-sum averaging from those that are not. This can be done, he said, by setting up separate accounts.
He advised that the best thing to do is select a trustee (such as a bank or mutual fund) that you are comfortable with. This trustee should be one that is able to offer you a wide variety of investment options consistent with your risk tolerance.
Discuss the variables with your trustee. Galer pointed out that some trustees offer more flexibility in their programs than others do.
Mag Poff will help find answers to your personal finance questions. Send them to her at the Roanoke Times & World-News, P.O. Box 2491, Roanoke, Va. 24010.
Memo: ***CORRECTION***