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By: Ted Benna Creator of the first 401(k) plan |
March 7, 2002
This Week, Ted Tackles:
My husband is still working and will be 70ý at year-end. Does he have to take money from his plan then? ý My employer was acquired. Can I roll over my 401(k) money to an IRA if the plan is being terminated? ý If I take a lump-sum distribution from my 401(k), can I do five-year income averaging with this money? ý Can I move my 401(k) money among investments in the plan without penalty?
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Q: My husband will be 70ý at the end of the year. He is
still working and contributes to his 401(k) plan. Does he have to take withdrawals from
his plan when he reaches 70ý or can he wait until he quits his job?
TB: Mandatory distributions are no longer required
at age 70ý to those who are still actively employed, with the exception of "5
percent owners" of the business. (Five percent owners are defined by the IRS as those
who own more than 5 percent of the business.) These individuals are still required
to take mandatory minimum distributions even though they may be actively employed.
So, unless your husband is a 5 percent owner, he won't be
required to take a distribution. He can wait until he quits his job. Also, he may continue
to contribute to the plan.
Q: My employer was acquired. Is there any way that I can
force my new company to return my 401(k) funds for transfer to my rollover IRA rather than
rolling the money into its less favorable 401(k) plan? The intention is to terminate the
old employer's 401(k).
TB: You should have the option to transfer the money
to an IRA if the plan is being terminated. The employer is required in this instance to
inform you of your options, which should include rollovers.
That said, the acquiring company could automatically
transfer the money from your old employer's plan into its plan rather than terminating the
old plan. In this case, you can't force the employer to transfer your money to an IRA.
However, this shouldn't occur if you have been informed that the plan will be terminated.
You should have the opportunity to complete the rollover to
an IRA once the IRS has approved the termination. That usually takes around six months.
Q: What are the rules, at this time, about taking a
lump-sum distribution of the money that I currently have in a 401(k)? I am currently 64.
If I take a lump sum, can I use the five-year averaging rules for the withdrawal starting
in 2002 whereby I get a tax break on what money is in the account currently?
TB: You don't mention whether or not you are still
actively employed by the company that maintains the plan. If you are, you can withdraw the
money in a lump sum if the plan permits in-service withdrawals after age 59ý. You may of
course also withdraw the money if you are no longer an active employee.
The 10 percent early withdrawal penalty won't apply because
you are over age 59ý but the distribution is fully taxable unless it will include
employee after-tax contributions.
Five-year averaging hasn't been permitted for a number of
years, and 10-year averaging is only available to 401(k) participants born before 1936.
Since you were born later, this option isn't available either. If your plan allows it, you
might consider taking periodic payments as a way to mitigate some of the tax bite. I
recommend you consult a professional tax advisor to help you create a situation that is
right for you.
Q: Can I move money around in my 401(k) without any
penalty? For example, if I don't like the way one of the mutual funds is performing, and I
move 500 shares to another fund within the program, is there a tax liability or a charge
for that?
TB: There aren't any tax consequences when you move
your money from one investment to another within a tax-sheltered retirement plan like a
401(k). This is one of the many benefits offered by these plans. You pay tax only when you
take money out of the plan.
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Ted Benna, creator of the first 401(k)
retirement savings plan, answers intriguing questions twice a month. With over 40 years of
experience as an employee benefits consultant, Ted is a nationally recognized expert on
benefits issues. He has authored three books, Helping Employees Achieve Retirement
Income Security, Escaping the Coming Retirement Crisis, and Tips for
Successfully Managing Your 401(k), 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. |
 Ted's Table Archives
The information provided here is intended to help you understand the general issue and
does not constitute any tax, investment or legal advice. Consult your financial, tax or
legal advisor regarding your own unique situation and your company's benefits
representative for rules specific to your plan.
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