October 15 is the final deadline to file your 2007 tax return, and you must file a return to receive your stimulus check.

As a result of the Economic Stimulus Act signed into law earlier this year, individuals who file a 2007 federal income tax return, and have $3,000 or more of qualifying income (including amounts received from Social Security and certain veterans benefits) may be eligible for a stimulus payment, provided that they have a valid Social Security number and can't be claimed as a dependent by someone else. (Individuals who have a spouse in the military do not need to have a valid Social Security number.)  Click here to read more.

 

October 6 - 12 is National Financial Planning Week.  In recognition of this week, Pamela Yip at The Dallas Morning News hosted an "Ask the Financial Planner" session through call-in and chat on Sunday, October 6.  I participated in the chat session, and we answered questions on annuities, bankruptcy, FDIC insurance, safety of investments, retirement income, and more.  Check out the transcript on DallasNews.com.

If you're entitled to a distribution from your 401(k) plan (for example, because you've left your job), and it's rollover-eligible, you may be faced with a choice. Should you take the distribution and roll the funds over to an IRA, or should you leave your money where it is?  Some things to consider:

Universe of Investment Choices

In contrast to a 401(k) plan, where your investment options are limited to those selected by your employer (typically mutual funds or employer stock), the universe of IRA investments is virtually unlimited. For example, in addition to the usual IRA mainstays (stocks, bonds, mutual funds, and CDs), an IRA can invest in real estate, options, limited partnership interests, or anything else the law (and your IRA trustee/custodian) allows. (Certain investments may not be right for everyone, and some may have adverse tax consequences, so be sure to consult your financial professional.)

While the investment flexibility that IRAs provide can be a benefit for some people, it may be a drawback for others. If you lack investment knowledge and experience, you may be more comfortable with the limited investment alternatives your 401(k) plan provides.

Distribution Options

The distribution options available to you in a 401(k) plan are typically limited, usually to a lump-sum payout, or installments payable over a period of years. And many plans require that distributions start if you've reached the plan's normal retirement age (often age 65), even if you don't yet need the funds.

Similarly, 401(k) plans often require that a beneficiary take a lump-sum payment shortly after the plan participant dies. This may not be a problem if your beneficiary is your spouse--he or she can roll the funds over to an IRA after your death. But a nonspousal rollover is possible only if your 401(k) plan allows it. And some don't, forcing your beneficiary to take a distribution he or she may not yet need.

On the other hand, you can access the funds in an IRA at any time. You--and your beneficiary after your death--can take out as much, or as little, as you want. While you'll need to start taking required minimum distributions (RMDs) after you reach age 70½ (and your beneficiary will need to take RMDs after you die), those payments can generally be spread over your (and your beneficiary's) lifetime. (You aren't required to take any distributions from a Roth IRA during your lifetime, but your beneficiary must take RMDs after your death.) A rollover to an IRA lets you and your beneficiary stretch distributions out over the maximum period the law allows, letting your nest egg enjoy the benefits of tax deferral as long as possible.

Note: Distributions from 401(k)s and IRAs may be subject to federal income tax. In addition, a 10% early distribution tax may apply if you haven't reached age 59½. (Special rules apply to Roth 401(k)s and Roth IRAs.)

Shelter from Creditors

Your 401(k) plan may offer better creditor protection than an IRA. Federal law currently protects your total IRA assets up to $1,095,000--plus any amount you roll over from your 401(k) plan--if you declare bankruptcy. (The laws in your state may provide additional protection.) In contrast, assets in a 401(k) plan generally enjoy unlimited protection from your creditors under federal law, whether you've declared bankruptcy or not.

Ease of Tracking

Another reason to roll your 401(k) funds over to an IRA is to consolidate your retirement assets. This may make it easier for you to monitor your investments and your beneficiary designations, and to make desired changes. It also helps make it easier to maintain your desired asset allocation and rebalance periodically.  You may also want to consolidate all of your IRAs. However, make sure you understand how Federal Deposit Insurance Corporation (FDIC) and Securities Investor Protection Corporation (SIPC) limits apply if you keep all your IRA funds in one financial institution.

A Few Additional Considerations

While some 401(k) plans provide an annuity option, most still don't. By rolling your 401(k) assets over to an IRA annuity, you can annuitize all or part of your 401(k) dollars.

Many 401(k) plans have loan provisions, but you can't borrow from an IRA. You only can access the money in an IRA by taking a distribution, which may be subject to income tax and penalties.

If you were born before 1936, lump-sum distributions from your 401(k) may be eligible for special 10-year averaging or capital gains treatment. A rollover may make you ineligible for these tax rules.