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February
23, 20000
This Week, Ted Tackles: The timing of minimum distributions …Calculating
minimum distributions when you have several IRAs and a 401(k) … Does the early
withdrawal penalty apply if you withdraw 401(k) money in a year you don't have income?
… How long does it take to get your 401(k) money when you cash out? … What to do
with post-tax contributions in a 401(k)-IRA rollover … 401(k) contributions can lower
your tax rate. |
Question: Regarding the Feb. 8 question about the
taxation and timing of minimum
distributions, I'm under the impression that the person will have until April 1st of the
year
following termination before the required distributions need to be made. Is that right?
TB: You're correct that the person leaving the employer after age 70ý has until April 1st
of the year
following termination to receive the required minimum distribution.
Question: I'll be 70 in May. I have a 401(k) and several IRAs. I know I must take
a
minimum withdrawal. Do I add up the value of each of the IRAs and the 401(k) to
determine how much I must withdraw, using the appropriate actuarial table? Can I make
the withdrawal from any of the accounts or must I make separate withdrawals from each
account?
TB: You must add the 401(k) and the IRAs. You have the option to take the money from all
or any
of the accounts as long as the total amount meets the minimum distribution requirements.
Question: What if I withdraw money from my 401(k) plan during a year in which I
have no
income. Do I have to pay an early withdrawal penalty in that case, also?
TB: Whether you are subject to the early withdrawal penalty depends on the age you are
when you
leave your employer, not on the amount of your other taxable income during the year you
receive
the distribution. The lump-sum distribution will be fully taxable and the 10% penalty tax
also will be
payable if you leave the employer prior to age 55. Of course the amount of total tax due
will be
reduced if you have no other income.
Question: I quit my job and would like to close out my 401(k) plan. The funds have
been
doing poorly and I feel I could put the money to better use elsewhere. How long will I
have
to wait for this money, and can I be denied this money?
TB: Most 401(k) plans permit you to take your money any time you want after you leave the
company. However, it's also legally permissible to require that the money stay in the plan
until you
reach retirement age. You need to check with your former employer to see whether
distributions
prior to retirement are permitted.
If you're permitted to withdraw your money, how long it will take to get it will depend
upon the
administrative structure for your plan. It could take only a few days after you submit the
applicable
paperwork, or it could take months. You should ask the person who oversees the plan of
your
former employer.
You should roll the money directly into an IRA where you pick the investments you want. If
you
don't roll the money over, it will be fully taxable plus a 10% penalty tax will be imposed
if you were
under age 55 when you left the employer.
Question: My husband has pre- and post-tax contributions in his 401(k) savings
plan. If he
should be laid off before age 59ý, what should he do with the post-tax money? The pre-tax
money will be rolled over to an IRA. I haven't read anywhere how to properly handle
post-tax contributions. Can he just take the money as a distribution since he has already
paid income tax on it?
TB: The after-tax money may not be rolled over. Your husband should take this portion as a
cash
payment and invest it for his retirement in a non-tax-sheltered vehicle outside the plan
or an IRA.
For example, he could invest the taxable (pre-tax) portion in several mutual funds by
establishing an
IRA rollover account and he could invest the after-tax portion in the same mutual funds by
opening
a personal account with the same fund company. He can, of course, invest the two portions
with
different financial organizations if he prefers.
Your husband won't have to pay tax when he receives the after-tax portion because he has
already
paid tax on this money.
As a last point, any portion of the distribution that is taxable, including investment
gains on after-tax
contributions, may be safely rolled over into the IRA.
Question: I just started contributing the maximum before-tax amount the IRS will
allow to
my 401(k). My gross pay falls in the lower end of the 28% tax bracket. After deducting
the 401(k) contributions, my taxable pay falls in the 15% bracket. My employer still
withholds taxes the on my pay at the 28% rate.
I thought that with my pay falling into the 15% tax bracket that I would be taxed at the
lower rate. Why don't I receive this tax benefit after my contributions push my gross pay
into a lower tax bracket?
TB: Your ultimate tax liability is established when you file your tax return, not when you
have taxes
deducted from your pay. If your employer is withholding more taxes than what is required,
you will
receive a refund when you file your tax return. You may ask your employer to reduce your
tax
withholding if more taxes are being deducted than what you think is required.
 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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