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Larry asks:

I've got a question regarding my own financial planning and then one for a buddy I'm helping become Foolish.

My situation:

I workat a business (I'm also part owner) that offers a SIMPLE plan. A SIMPLE is basically a small business 401k. I can contribute $6,000 annually and the company will match 3% of my salary (+/- $3,000 including bonuses). This is pre-tax money that will be taxed years down the road. Right now I'd planned on putting away $6,000/ year and then putting add'l money towards two Roths - one for my wife and one for me. Would it not be smarter to hold my SIMPLE around $3,000/year, fund the two Roths at $2,000 each, and, THEN, put add'l money in the SIMPLE? This approach would insure us of the Roth's advantages.

Assuming the same rates of return in the SIMPLE and the Roth IRAs, the same marginal tax rates now and in the future, and a full (i.e., $2K each) contribution to the Roth IRAs, then that approach will result in a better payoff for you in retirement due to the tax advantage of the Roth.

My buddy's situation:

He works for a company that was recently purchased by a competitor. His job is safe. He contriubutes to a 401k plan and also to a pension plan. Is it possible/legal to roll a 401k plan to an IRA if the new business offers a 401k? Is it the new company's decision? Can he roll his pension into an IRA with or without converting his existing 401k? The new company does not offer a pension plan. I've convinced him that the Foolish approach will most likely beat the pants off the mutual funds offered by the 401k/ pension plans.

In a buyout situation, the new owners will decide what to do with the old retirement plan(s). Your buddy's benefits administrator is in a far better position to answer this question than we are. If the new owners don't continue the old 401k but wish to merge it with their existing plan, then your friend will almost certainly be allowed the opportunity to transfer the old 401k money to an IRA of his choice or to the new 401k plan. If the new owner keeps the old plan, he won't.

The pension plan is more complicated, and again the best folks to ask are the benefits people at his employer. Often, these plans are simply "frozen," meaning they continue in existence with no further accumulation of value until the employee retires. If that's the case, it's unlikely your friend will be able to transfer that money to an IRA until he leaves his job or retires.


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