Saving Savings
By Gene Meyer, The Kansas City Star - March 2005
New federal regulations are making it tougher to scramble your nest egg when you change jobs.
Starting Monday, new rules created by the Internal Revenue Service and the Labor Department will require more employers to roll the
Workers, who these days are changing jobs more than once every four years on average, have always been encouraged to roll their company retirement savings into IRAs when they moved on.
Until now, if they chose not to do that, they could leave accounts of more than $5,000 with their former employers to continue growing. But unless the workers asked their employers to roll the money over into an IRA, employers could, and often did, simply cash out amounts of $5,000 or less to reduce bookkeeping and administrative costs.
This system often was particularly brutal for younger workers, who often do more job hopping and don't pile up big savings at each job, said Reggie Bowser, president of RolloverSystems, Inc., a Charlotte, N.C. technology firm that processes these transactions.
"If young people receive a cash-out check, they usually spend it," Bowser said.
And depending on their tax situation, many end up sending as much as 40 percent of their payout back to Uncle Sam to pay taxes and penalties for cashing in their plans early.
"They're cashing in their future," Bowser said.
The new rules, stemming from the tax laws passed in 2001, significantly change how those transfers are handled. Now when departing employees' accounts exceed $1,000 and no one specifies how to handle the money, employers must open a so-called safe harbor IRA in the employee's name and put the funds there instead of mailing a check. Then it's up to the employee to decide what to do with the money.
These IRAs won't be flashy. Most will be simple money market accounts, certificates of deposit or other conservative choices for preserving capital.
The new rules represent a significant improvement for workers who are changing jobs, said Julie Welch, tax services director at Meara King & Co., a Kansas City accounting and consulting firm.
Under the old rules, employees could avoid the severest penalties by putting their cash-out checks into an IRA within 60 days of the payout, Welch said. One problem is that many employers withheld up to 20 percent of the funds to cover potential taxes. That 20 percent also needed to be re-deposited to avoid penalties, and the only way to do that, for many individuals, was to cough up additional funds themselves.
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