RETIREMENT FUNDS: NEW LAW MAY AFFECT FULL VALUE OF NEST EGG

Your "nest egg" may be at risk.

People who are retiring or changing jobs after the beginning of the year could find their retirement money reduced by a new tax law governing distribution from many qualified retirement plans.

"People who have scrimped and saved for retirement need to study the alternatives even more carefully than before, deciding how to receive the distributions from their company retirement," said Marsha Limbaugh, branch manager of A.G. Edwards Investment office at Cape Girardeau. "A hasty decision could substantially reduce the nest egg they have built up over the years."

One out of every $5 people saved for retirement may be at risk under a new federal tax law which was enacted in July of this year.

The new law, passed by Congress and signed by President George Bush, requires that 20 percent be withheld from a lump-sum distribution made to employees from tax-deferred savings plans after Jan. 1. The monies will be used to pay for extended unemployment benefits that were also approved in July.

Lump-sum distributions are those one-shot whoppers that people get when they leave a company and no longer take part in pension, profit-sharing or similar plans. One of the most popular plans is the 401(k). Regular monthly pension checks won't be affected.

The new payment plan may be a surprise to many.

"Not much has been said about the plan yet," said an IRS spokesman. "We don't have all the details, but it will be included in the 1992 tax guide."

Under present law, employees can disburse the entire balance of retirement plans and employees are not required to pay any taxes if they roll the money over into an IRA or another qualified plan within 60 days of receiving it, said Limbaugh.

There are two simple approaches to the problem.

"If you instruct your employer to transfer the balance of your retirement plan directly to the custodian of your IRA, you will not be subject to the 20 percent mandatory withholding," said Limbaugh. "Or, if your current employer allows, you can leave your money in the plan you now have."

A third choice is the one that financial specialists predict will cause the most confusion.

Although some restrictions may apply, most savers currently are allowed to cash in IRSs, 401(k)s and other tax-deferred pension plans as long as they plow the money back into a similar plan within 60 days.

Starting Jan. 1, the new withholding plan goes into effect. If closed to roll a pension plan into an IRA, the employer must withhold 20 percent.

For example, if an employee has $100,000 invested in a 401(k) retirement plan and chooses to take receipt of that money due to retirement, layoff or job change, the new law requires the employer to withhold $20,000.

"You'll receive $80,000, and will have 60 days to roll the money over to an IRA," said Limbaugh.

Here's where things start getting tricky.

To preserve the tax benefits for the full $100,000, you must come up with $20,000 more from somewhere to put the new IRA at $100,000. If you succeed you get your "withholding" ($20,000) back after you file your next tax returns.

"Obviously everyone can't do that," said Limbaugh.

So, what if you don't come up with the $20,000?

Until the new IRS regulations are published, no one can say exactly say what would happen, but most specialists say it's a good bet the $20,000 would be counted as income on which you would pay taxes.

"You might also have to pay additional penalties for withdrawing your money early," said Limbaugh. "Deciding how to invest retirement funds has always been an important decision," she said. "In the past, this decision could be made after you received the money. Starting Jan. 1, it will be advantageous to make that decision before telling your employer you are retiring."

Following are some of the options of dealing with the situation if you expect to retire or change employment after 1992:

Leave money in your current employer's plan if the company allows it. There is no transfer, so there is no withholding. The money will continue to grow tax-deferred until you find another plan or IRA to which you can move it later. Make sure your company allows this before you try it.

Ask your employer to transfer the money directly into another IRA or qualified plan. Nothing will be held from the retirement savings moved directly from one plan to another.

Take the money and put it into another IRA or qualified plan yourself. The withholding requirement will cut your payout by 20 percent. However, it can be refunded after you file your income tax return if you put an amount equal to the distribution into a new account within 60 days.

Starting periodic cash withdrawals. The money you withdraw will be taxed, but you pay a 10 percent penalty for early withdrawal. This is a difficult choice. You will be required to take those payments and pay taxes on them for five years or longer.

Take all the money right away. This is generally your least attractive choice. Twenty percent of your savings will be withheld. You may be required to pay an additional 10 percent penalty for early withdrawal. You will be required to pay income taxes on the entire amount when you file your next returns.