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 calculate the minimum
required distribution for the 401(k) and the IRAs separately. However, you may take your
IRA distribution from one plan. If you have more than one 401(k) you would have to take a
distribution from each plan.
Question: I contribute $75 a week to my 401(k) plan, which
I just started up again after closing it two years ago on the fear of how safe it was.
What are the laws concerning the safety of my money at retirement? I'm not that trusting
when it comes to the honesty of my employer.
TB: Once the money is put into the
401(k) plan it must be used to provide benefits to participants. It may not be legally
used for any other purpose. The fact that a third-party administrator handles the plan is
also a plus. If you receive timely statements showing the money you have invested in the
plan, this should also make you more comfortable. There probably are participants who have
left your company. If they received their money without any hassle, this is another
indication that the plan is being properly managed. The last point to consider is the
funds where the money is invested. If it is going into mutual funds or similar investments
managed by a large financial organization, this should further bolster your confidence.
Question: In a 401(k) plan with a failed ADP Test, the HCE
takes a refund in February 2000, and declares it as 1999 income. Why would the
administrator not produce a 1099-R for 1999? Instead, they state that they're going to
produce a 1099-R for 2000 and get it to the HCE in 2001.
TB: Excess contributions that were
returned prior to March 15, 2000 should be reported as taxable income for 1999. Excess
contributions returned on March 15, 2000 or later are to be reported as taxable income
during 2000. The employer must pay a 10% penalty tax when excess contributions are not
refunded prior to March 15th of the year following the year they are contributed to the
plan. From the information you have provided, I would agree that the 1099-R should be
issued reporting this amount as taxable income for 1999.
Question: At age 27 I recently took a job at a new employer
without a 401(k).
My new employer doesn't expect to have a 401(k) plan set up until late this year. At my
previous employer I had a 401(k) and was told that if I had under $5,000 in my account I
needed to transfer the account into another tax-deferred vehicle.
My previous employer referred me to a mutual life insurance company. I was guided down the
path of a variable annuity and led away from the light of a Traditional IRA or a Rollover
IRA. I was also led to believe that a 401(k) has higher administrative fees than a
variable annuity. The more I'm reading about variable annuities I'm finding out just the
opposite. What's your advice?
TB: In my opinion, a variable annuity
was not the right choice unless you are retiring and want an immediate, guaranteed life
income. Transferring the money directly into an IRA rollover account with a no-load mutual
fund would have been a better alternative.
You can transfer the money from the variable annuity into a no-load mutual fund but there
probably will be a back-end surrender penalty. I recommend contacting the person who made
this recommendation and telling them you want the loss restored. Your former employer may
have to pay this amount to you directly as taxable income but that is better than having
to accept the loss. If the person who made this recommendation does not agree, tell
him/her you will ask the Department of Labor to help you. Their phone number is
800-998-7542.
Question: How can I keep my 401(k) from going into my
estate? Can I change the beneficiary from my spouse to a revocable trust?
TB: Your 401(k) account will still be
part of your taxable estate even if you change your beneficiary to an irrevocable trust.
If you want to get the money out of your estate, you need to consider a charitable
remainder trust and/or some other estate-planning techniques. You should consult an
estate-planning professional who can help you explore various alternatives.
Question: Our 401(k) plan is a prototype plan. I know that
in performing the discrimination testing, it is permissible, at least in certain
circumstances, to report only a portion of the year's wages for newly eligible
participants. In other words, if an employee earns $50,000 per year, but cannot join the
plan until July 1st, you can only report the $25,000 he earned during the part of the year
he was eligible. In this way, if he contributed 10% from July through December his
percentage is 10% for the year. If you use his entire year's earnings his contribution
rate for the year is 5%.
Must the plan specifically provide for using this device, or may it be used without being
spelled out as long as it is used consistently for highly compensated employees as well as
non-highly compensated employees?
TB: You are required to follow the
language contained in your plan document. For example, you are required to follow the
vesting schedule contained in your plan document even though other alternatives are
legally possible.
If you do not like the definition contained in the document, you need to consider amending
the plan. The adoption agreement may give you the necessary latitude to make this change.
If it doesn't, you may either amend the actual plan or have someone prepare a customized
plan document for you. If you amend the actual prototype document, it will cease to
qualify as a prototype. You should discuss these alternatives with the organization that
handles your plan or another professional advisor.
Question: My 401(k) plan is with the state government and
I'm going to retire in one year. I can leave it there and take monthly distributions on an
annuity-type plan but once I choose that plan I am locked in for the rest of my life and
cannot touch the principal. Also, I don't have to pay state taxes on those distributions.
Most of my fellow employees are rolling their money over to an outside fund and are able
to access the principal if needed. What are your recommendations?
TB: Personally, I would transfer the
money out of the plan; however, I am reasonably comfortable picking my own investments. I
am also not particularly concerned about locking my retirement funds into a guaranteed
stream of life income. But, what is right for someone else is not necessarily the best
thing for you. If having a guaranteed stream of life income without having to worry about
managing the money is the most important thing to you, consider leaving the money in the
plan. You should also consider seeking help from a qualified, independent professional if
you are not comfortable making this decision on your own.
 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.
|
