Question: My employer terminated me in November
1999. I'm 77 years old. Before I was
70ý years old I elected to defer taking minimum required distributions until I retired or
I
was terminated. I asked all three parties in control of my 401(k) portfolio if I had to
take
this before January 1, 2000 and could it be processed by then. I asked the question
December 1, 1999. I haven't received an opinion. Am I in trouble with the IRS?
TB: Your distribution must be made within 60 days after the end of the plan year during
which you
were terminated.
Assuming the plan year ended on December 31, 1999, you must receive your distribution by
February 29, 2000. The distribution will be fully taxable as ordinary income in the year
you receive
it without any penalty. The financial organization that pays the benefit is responsible to
report the
distribution to IRS. They should report this as a normal benefit distribution. You
shouldn't have any
trouble with IRS as long as you pay the applicable income tax.
Question: I'm looking to roll my 403(b) into another investment. I'm thinking
about a
variable annuity, which offers a very good mix of investments. However, I've been told
annuities are the last place I should put my money. Can you provide some insight? I
understand that annuities may be somewhat more expensive, with deferred sales charges
if taken out before eight years and I don't plan on setting up a fixed guaranteed income
upon disbursement at 59 1/2. Are there tax implications that I'm not aware of?
TB: Variable annuities usually charge an extra asset-based expense charge annually, which
is equal
to 1% to 1.5% of the total amount invested. Your net annual investment return is reduced
by this
extra percentage. As a result, your annual return will be 1% to 1.5% less than if you
bought the
same funds outside a variable annuity. You can do this by rolling your 403(b) money into
an IRA, if
you are no longer an employee. The IRA may be established directly with a mutual fund
company
or through Schwab or one of the other organizations that gives you access to many
different mutual
funds without tacking on an additional fee.
Question: I've been told it's possible to keep my net paycheck and increase my
deductions
and contribute money to a 401(k). My company allows 5%, 10% and 15% contributions.
How do I compute this? My net income is needed to pay my monthly bills. Figuring out
how many more deductions I can claim and the percentage I can contribute are very
important to my final decision. I'd appreciate some advice.
TB: If I understand your question, your goal is to increase your 401(k) contributions
without
decreasing your take-home pay. The best way of doing this is to use all or a portion of
any pay
increase to accomplish this goal. For example, if you receive a 4% raise, you should be
able to
increase your contribution rate by 3% without any reduction in your take-home pay. If you
contribute the entire 4% increase to the 401(k), you'll experience a small decrease in
your
take-home pay because the pay increase will be subject to Social Security taxes and
possibly state
and local wage taxes.
The idea you mention, reducing the amount of taxes that are withheld from your pay so that
the
reduced tax withholding will enable you to increase your 401(k) contributions without any
drop in
your net pay, will work only if you are having more taxes withheld then what is required.
Some
people use tax withholding as a form of forced "savings". They have more tax
withheld than
necessary so they'll get a refund when they file their tax returns. If you receive a
refund when you file
your return, you may want to consider reducing your tax withholding and use the
"extra" money to
increase your 401(k) contributions.
Let's assume you typically receive a $1,000.00 tax refund. This means you're having
approximately
$20.00 more per week deducted for taxes than is required. You could reduce your tax
withholding
by $20.00 per week and have this amount put into the 401(k). Assuming your employer
matches
50 cents to every dollar you contribute, your retirement account will gain $3,000.00 per
year.
Remember that you will no longer receive a tax refund.
If you don't receive tax refunds, then you won't be able to reduce your tax withholding to
fund an
increase in your 401(k) contributions without reducing your take-home pay. The only way
this will
be possible is by using pay increases as I mentioned above.
Question: To pay for our wedding, my husband took out a $12,000 loan from his
401(k)
plan. The company subsequently closed its foreign offices, where my husband worked, but
the headquarters is still open and so is the 401(k) plan. Since he now doesn't have the
option of paying this loan back through payroll deductions, the 401(k) administrators told
him that the only way to pay it back now is by submitting a lump sum. Is it true that we
can't pay it back over time?
TB: Legally a loan may be repaid by personal checks sent to a former employer; however,
most
401(k) plans require loans to be repaid through payroll deductions. When one's employment
is
terminated, this method of repayment is no longer possible. Employers aren't willing to
take monthly
checks from former employees because the processing required is much more expensive than
payroll deduction.
The unpaid loan balance must then be repaid via a lump sum. Otherwise the unpaid loan
balance will
be reported as a taxable distribution. This usually is painful because the money borrowed
has been
spent. This is one of the reasons why I recommend avoiding 401(k) loans unless you are
very
confident that your employment will continue uninterrupted with your present employer for
the next
five years.
Question: We're considering buying a co-op to gain some equity while saving for a
more
expensive house. We expect to pay cash. However, we aren't sure if this will qualify as
our
first residence thereby disqualifying us from using up to 50% of our 401(k) money when
we purchase the house?
TB: It's necessary for me to make some assumptions in order to answer your question. I
assume
your plan permits you to borrow up to 50% of your 401(k) account to use for the purchase
of your
first residence. If I'm correct, the fact that the loan must be used only for a first
residence is a rule
that your employer has established in the plan document. You should discuss your goals
with the
person who oversees your plan to see how he or she would deal with this specific
situation.
Question: Say your company doesn't pass discrimination testing and some of the
highly
compensated employees have to be refunded 401(k) money. I was told that if this takes
place in 1999, the money is refunded in 2000. So, you receive a 2000 1099R, but the
1099R is for the year 1999 and you must re-file your taxes for 1999.
Why can't you add the refund to your 2000 compensation, as the event is occurring in 1999
but the money is paid in 2000? I was told that the taxes are based on the year of the
deferral not the event of the return of the cash. This doesn't make sense. What is your
opinion?
TB: There isn't a simple answer to your question. It depends upon the timing of the
refunds. If the
refunds are made within 2 1/2 months after the end of the plan year, the amount refunded
is taxable
in the year during which the contributions were made. If the refunds aren't made until
more than 2
1/2 months after the end of the plan year, the refunds are taxable in the year when they
are received
and, in this instance, the employer must pay an excise tax equal to 10% of the amount
refunded. I
have assumed in this instance that the plan year is the calendar year.
Let me try to clarify with examples. First, assume you receive a $1,100 refund of excess
contributions plus applicable investment income on February 28, 2000 for the 1999 plan
year. The
$1,100 refund is taxable as income for 1999. If you've already filed your return for 1999,
you will
have to file an amended return.
Now, suppose you don't receive the $1,100 refund for the 1999 plan year until April 1,
2000, three
months after the plan year ended. The refund will be taxable during the 2000 tax year and
your
employer must pay a $110.00 excise tax.
If you're one of the highly compensated employees, it's advisable to delay your tax filing
until either
the completion of non-discrimination testing or March 15th.
 Read Ted Benna's Biography
Ted's Table Archives
Ted Benna, creator of the first 401(k) retirement savings
plan, answers intriguing questions every Tuesday. With over 30 years of experience as an
employee benefits consultant, Ted is a nationally recognized expert on benefits issues. He
has authored two books, Helping Employees Achieve Retirement Income Security and Escaping
the Coming Retirement Crisis, and is President of the 401(k) Association. Ted is a
frequent speaker at meetings of 401(k) plan sponsors and participants. His articles and
comments have appeared in numerous publications, including The New York Times and The Wall
Street Journal.
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