Question: I'm thinking of withdrawing money before age 59ý from my 401(k), by using the life-expectancy tables and taking equal withdrawals. Can I take a yearly interest on my balance into account when calculating what my withdrawals would be?

TB: As you are probably already aware, you may take periodic withdrawals from your 401(k) only if your plan permits you to do so. Most 401(k) plans require you to take the money as a lump-sum distribution.

You do not have to worry about satisfying the annuity rules under Section 72(t) of the Internal Revenue Code if you are over age 55 when you leave your employer. You must, however, structure your distribution in a manner that satisfies Section 72(t) if you are under age 55 when you leave your employer. The amount you withdraw should be computed using a reasonable interest rate. In the past, using 120 percent of the 30-year Treasury Bond rate has been accepted by the IRS as a reasonable rate. The organization that administers your plan should compute the amount you may withdraw without penalty.

Question: Can I withdraw my after-tax contributions from my previous employer's 401(k) plan and roll over the total (approx. $10,000) into a Roth IRA?

TB: You should be able to withdraw your after-tax contributions and roll over the taxable portion into a Roth IRA, unless your income exceeds the applicable limit. You should contact someone at the financial organization where you intend to establish the Roth IRA to make certain you will be eligible to transfer the money into a Roth IRA.

Question: I started a business this year. I cannot decide what is the best way to tax defer for myself and the only other employee. The business should make $190,000 per year and has virtually zero expenses! I looked at Keogh plans ... they allow 25 percent up to $24,000. I also see the 401(k) does the same. Is there a reason to choose one over the other? We need no special features on our plan, just the ability to tax defer as much as possible.

Does the cost of a defined-benefit plan outweigh the extra dollars I would be able to sock away? Can I set up a defined-benefit plan for myself and have a different plan for the one other employee? Also, is a defined-benefit plan worth it if I see the business closing in three years?

TB: Whatever type of plan you establish will also cover your eligible employee, so you need to factor this cost into your planning. A defined-benefit plan could be worthwhile even if you close the business in three years. The key is the amount you will be able to deduct with this type of plan, compared to a Keogh or 401(k) plan. For example, you might be able to deduct $50,000 or more with a defined-benefit plan. You can find an independent actuary or a financial organization that will charge reasonable fees if you shop around.

Defined-benefit and Keogh plans are funded solely by employer contributions. A 401(k) is funded by employee contributions or by a combination of employee/employer contributions. The maximum combined-employee/employer contribution you can receive with a 401(k) is 15 percent of your W-2 income. The individual limit is 25 percent of pay, but there is a 15 percent of pay corporate-deduction limit that will further restrict how much you can contribute to a 401(k).

You need to consider the maximum amount you may contribute to each type of plan, the amount you must contribute for your employee, and the cost of establishing and maintaining the plan. An independent retirement-planning consultant, or one of the financial organizations that handles plans for small employers, can help you explore your options.

Question: Our employer is ending our 401(k) plan with our current plan provider and starting a new one at a different provider. Some people are not happy with the choices provided by the new plan and are wondering whether they can roll over the money from the old plan into an outside IRA, while continuing monthly contributions into the new plan to maintain the tax advantage. Would this be allowable without a penalty or taxes, or can you only roll over a 401(k) into an IRA when you leave your current job?

TB: Your employer is changing from one provider to another provider. This is technically a continuation of the same plan, just with a new provider. Your opportunity to withdraw money is limited to the reasons permitted by law, which include IRS-approved financial hardships, participant loans, and post-age 59ý distributions. These are the only reasons that enable you to access the money in your account prior to leaving your employer.

Taking a hardship withdrawal results in a taxable distribution, so this isn't a great option even if you qualify for such a distribution. Loans must be repaid, so they also aren't a great option. Most participants have no real choice when their employer changes providers other than to live with the results.

Those of you who are not happy with the new investment choices should inform the person at your company who oversees the plan. I recommend submitting a written explanation that explains exactly why you are not happy with the new fund selections.

Question: My company changed 401(k) administrators and charged to the participants the cost of a penalty on fixed-guaranteed fees from the old administrators. Is this legal? No one was told about losses in our fixed fund.

TB: Yes, your employer may legally change providers, even if this triggers a loss such as the one you experienced; however, your employer is required to make such decisions considering solely what is in the best interest of participants.

The situation you described is a somewhat common problem with small employers when they establish their first 401(k) plan. Because they are not experienced 401(k) buyers, they are more likely to buy a plan from an organization that has high fees, including back-end surrender charges. Your employer probably wasn't aware of these surrender charges when the plan was established because the organization that sold the plan didn't disclose this information. The provider's representative probably didn't tell participants either when you joined the plan. The Department of Labor has addressed this problem during the past couple of years by putting pressure on providers to fully disclose fees.

Typically, employers that buy a plan from such a provider get smarter after a few years; they begin to realize there are better alternatives. Unfortunately, the back-end surrender charge makes it difficult to move to a better arrangement. Continuing with the original selection isn't a good option either due to the higher fees. Employers who are in this situation must either live with what they know is not a great long-term arrangement for participants or move to another provider triggering the surrender penalty. Your employer decided to make the change — you and other participants should benefit from lower fees with the new provider.

Ted Benna, creator of the first 401(k) retirement savings plan, will answer your most 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.

Read Ted Benna's Biography

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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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