Retirement Funds, IRAs and Long-Term Care Coverage

This week, Gail addresses the pros and cons of rolling a former employer's retirement account into a self-directed IRA and has a few tips if you are looking for long-term care insurance.


Dear Gail,

I am 52 years old. I participated for many years in my employer's retirement plan and now have a total plan value of about $400,000. This includes both pre-tax and post-tax personal contributions and employer matching contributions, as well as gains on investments. I have left the company and am now self-employed.

Under the rules of the plan, I can leave my investment in place, and can make changes to the allocation among the various funds in the plan. However, I cannot make any additional contributions or partial withdrawals. I do not anticipate going back to work for another company with a savings plan that I could roll these assets into.

Can you please highlight some of the pros and cons of leaving the funds with the existing plan versus rolling them into a self-directed IRA?

Thank you,



Dear Wes,

Many companies give you the option of leaving your retirement money in, say, the 401(k) plan. However, in most cases I strongly believe you are better off rolling the money into an IRA.

The key is that this be done via a direct transfer, with the money moving from your retirement account to an IRA account. DO NOT UNDER ANY CIRCUMSTANCES allow your former employer to issue you a check for the amount. If this should happen, the government requires them to withhold 20% of the value to cover taxes in the event you don't follow through on the rollover!

The main reason I like getting the money out of your old plan is it gives you more control, more choices and greater flexibility. Instead of perhaps a dozen mutual funds to choose from, the whole world of investments opens up: A self-directed IRA allows you to choose among 8,000 mutual funds, individual stocks, bonds and even gold coins.

In addition, you have more control over what happens to the money if you die. If your spouse is the beneficiary of your retirement account and you've left the money back in your old plan, the plan itself dictates the choices she has. Some will allow the spouse to leave the money invested, while others require that it be withdrawn within a certain period of time (generally one to five years). Upon withdrawal, your beneficiary has to pay income tax on the entire amount.

But regardless of the plan rules, a spouse beneficiary always has the right to roll over retirement money into an IRA in her own name. There are several advantages to this, but the main one is it allows the money to continue to grow on a tax-deferred basis.

Now suppose you don't have a spouse. Perhaps you're single, divorced or your spouse has pre-deceased you. And you've named someone else — child, a nephew — as the beneficiary of your company retirement account. In most cases, the plan rules are much more restrictive, usually requiring a non-spouse to empty the account in a year. Not only are taxes due on the lump sum, but they lose the benefit of continued tax-deferred growth!

Why can't your nephew simply roll the money into an IRA? Because that is a privilege reserved only for a spouse.

Having your money in an IRA gives you more flexibility than a company retirement plan in a number of ways. First of all, you can split your IRA into as many separate IRAs as you want. Each can have a different beneficiary. Furthermore, should you need to access the money in your IRA prior to age 59 1/2, you can take penalty-free withdrawals under Section 72(t) of the tax code from just one IRA. You don't have to base the amount on the total of all your IRAs.

Finally, here's another reason to take control of your retirement account: corporate mergers. I know of cases in which a company is bought out by another and the new firm installs its own version of a retirement plan, changing all of the investment choices. So even if you really like the mutual funds in your existing plan, there's no guarantee they'll be there forever.

Having said all of the above, a word of caution. IRAs do not necessarily enjoy the same level of creditor protection as company-sponsored retirement plans. That's because the rules vary depending upon what state you live in. That is, there is no federal regulation which covers this aspect of IRAs. So if you are engaged in a profession or lifestyle which leaves you vulnerable to being sued, your should consider leaving your money in your former employer's plan. If this isn't an issue, then do the direct rollover. A financial advisor in your area should be able to help you make the right choice.

Hope this helps,



I just read your column for the first time and realize you really know your stuff! I have a question Would you list some reputable sources for obtaining long-term care insurance coverage, not just within a nursing home but also within a person's home?

Thanks much,



Dear Barbara,

This is exactly the kind of issue the internet was made for! There is a wealth of information at your fingertips if you search under "long-term care insurance." In addition, your state as well as the federal government are good sources. So are organizations such as AARP, which also has a Web site.

According to most experts, the best age to take out a long-term care policy is in your late fifties — any earlier and you're paying for coverage you probably won't need; any later and your premiums will be substantially higher.

However, unlike auto or homeowners insurance policies, there is no "standard" coverage in the long-term care arena. That means you have to really dig into each and every policy to find out what's covered, to what extent, when coverage kicks in, how long it lasts, etc.

I speak from firsthand experience, having spent literally months researching policies for my mother. I strongly recommend you get a policy which covers care both in a nursing facility and in your home. The fact is, most people want to remain in their own homes as long as possible. And contrary to commonly held beliefs, most seniors in need of care are not completely disabled. They might need help in a few areas — say, bathing or getting dressed in the morning — but not in every facet of daily life. So if you want to maintain your independence as long as possible and receive help while still living in your own home, a policy which only covers full-time nursing home care will be of no use.

Equally useless is an insurance company which goes out of business! Insurance is only as good as the company which stands behind it. This doesn't mean you should automatically reach for the most expensive policy, but you want to be mindful of the financial strength and reputation of the insurer.

As you probably know, health care costs are rising at a much faster pace than prices in general. That's why most long-term care policies offer inflation protection. Coverage of $100 per day might sound adequate today, but in ten years, the cost of a nursing home stay could be $150.

My general rule of thumb is to consider inflation protection — which costs extra — if you're young. That is, if you are going to live long enough for inflation to be a problem. If you are in, say, your eighties, you might not need this added protection. That frees up money to pay for some other benefit, such as assisted living care.

I applaud you for thinking about this. As more baby boomers reach their late fifties and demand for long-term care insurance rises, we should see more competitive pricing and perhaps even federal regulations which standardize policies and make them easier for the lay-person to compare.

Make no mistake about it: choosing the right long-term care insurance is not easy. You might want to consider working with a specialist who can sort through the legalese for you and help you choose the right policy at the best price.

Good luck!



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The views expressed in this article are those of Ms. Buckner or the individual commentator, and do not necessarily reflect the views of Putnam Investments Inc. or any of its affiliates. You should consult your own financial adviser for advice regarding your particular financial circumstances. This article is for information only and is not an offer of the sale of any mutual fund or other investment.