Question: I've been saving money in my company's 401(k) plan for my daughter's college education — she will be starting this summer. The IRS has liens against me for owed back taxes and I will be filing bankruptcy soon to liquidate what is owed. Can the IRS seize my 401(k) before or after filing?

TB: I'm not an expert on the bankruptcy laws but it's my understanding that you can't obtain relief from the back taxes you owe even through bankruptcy. I believe the IRS will use its full enforcement power to collect the amount you owe even after bankruptcy.

You're permitted to withdraw your 401(k) money to pay back taxes; however, doing so is painful because you will have to pay tax on the amount you withdraw, plus the 10 percent penalty tax if you are under age 59ý. Only the amount remaining can be used to pay your back taxes. I realize taking this step will disrupt your plans to use this money for your daughter's college education, but getting rid of this tax burden may need to be your first priority.

Consult an attorney who is familiar with the bankruptcy laws before you give further consideration to this option. The attorney will be able to tell you exactly what protection this action may provide.

Question: I currently have a work visa and I'm working on getting my green card. My employer has a 401(k) plan and I am 24ý. Should I wait until I have the green-card issue resolved, or should I start investing right away?

TB: There isn't any reason to wait. You should start to participate in the 401(k) as soon as possible, particularly if you get a matching contribution from your employer. Otherwise, you're losing money that you will never recover.

Question: When I left my former employer last September, I cashed in my 401(k). I paid off all my debt, put 20 percent down on a house, and reinvested $10,000 in the stock market. When tax time came this year, I owed the IRS a hefty amount of money. How long do I have to reinvest some or all of my 401(k) disbursement? My accountant didn't factor in that I reinvested some of the money.

TB: How you invested the $10,000 you had left from your 401(k) balance is irrelevant. In order for this amount not to be taxable, you had to deposit it into an IRA-rollover account within 60 days of receiving your 401(k) distribution.

The $10,000 you used to buy stocks was fully taxable, if you did so using a personal brokerage account rather than an IRA-rollover account.

If this is what you did, the entire distribution you received from your 401(k) was taxable, plus a 10 percent early withdrawal penalty would have applied if you were under age 59ý.

Unfortunately, the key is not that you reinvested $10,000 into the stock market, but that you didn't do so using an IRA rollover. It seems your intent was to continue to tax shelter this money, but you had to reinvest it via an IRA rollover if you wanted to avoid paying tax on this money.

Question: In these days of huge deposits of money sitting in 401(k) accounts, there is one thing I don't understand. It appears that employers and plan providers can deduct money from your account and give you NO explanation. If one has a deposit at a bank, they must account for every cent, both going in and coming out. In my 401(k) account, there are numerous deductions to my account balance with no explanation at all. Please explain why this can happen and where I might complain ... somewhere except my own company and the plan provider.

TB: Companies that manage 401(k) plans are legally permitted to deduct the investment-management fees and the applicable fees for administering the plan. The fees that are deducted must be reasonable and the organization that deducts fees should explain them to you.

The Department of Labor is the organization that oversees this area of the law. They have published a helpful booklet titled A Look at 401(k) Plan Fees ... for Employees, which may be obtained for free on their web site. You can also call the Department of Labor at (800) 998-7542.

I also suggest you read about plan fees in Your Guide to Understanding 401(k) Plan Fees, here on the 401Kafý. This also may be helpful.

Question: My wife is leaving her job this month and will have about $18,000 in a pension fund. This money is separate from her 401(k). If we can't leave it with the company for now (until we decide when to use it), is it best just to roll it into a new rollover IRA in order to avoid any possible tax penalties?

TB: Your wife's employer can't force her to take this money prior to retirement age because her benefit exceeds $5,000. The company must permit her to leave the money in its plan, but this may not be the best alternative. The first thing you need to consider is what investment return she will receive if she leaves the money in the plan. The next point to consider is whether she retains any control over her investment after leaving that employer.

The last point is the stability of her employer. Suppose there is a change in corporate ownership? It can be difficult tracking down a benefit after she leaves. I'm personally experiencing this problem with a pension benefit. My former employer has been sold twice in the last seven years and I am having a hard time getting a confirmation of my benefit after numerous telephone calls. As a result, I generally recommend transferring the money directly into an IRA-rollover account, where your wife will have complete investment control. And, you won't have any question where the money is.

Question: My wife is leaving her full-time job to take care of our kids and work part time. She was with her former employer for about four years and accumulated about $7,000 in a 401(k) plan. We're leaning towards using this money, and taking the tax hit, to pay off some debt. I have a good position at my company and an excellent profit-sharing and 401(k) plan, so we feel comfortable with this decision.

What is the best way of going about this? Is there any advantage to rolling this money over into an IRA, even for a short period of time, and then cashing out? Or, do we just take the payment now, less the 20 percent tax deduction my employer will automatically withhold, and then pay the penalty at tax time?

TB: My first piece of advice would be to continue to tax shelter this money rather than take the tax hit. So, rolling the money into an IRA gives you this option. Let me remind you that unless you have the money directly transferred into an IRA, you have 60 days to roll the money over without paying taxes on it.

If you decide you want the money, depending on your tax bracket, you could lose 30 to 40 percent when you pay the regular tax, plus the 10 percent penalty tax.

If you do want the money, you need to deduct enough to cover your total tax liability. I recommend paying the full tax when you receive the distribution, via an estimated tax payment, in addition to the 20 percent that is withheld.

I also recommend using the remaining amount to immediately pay off your bills. Unfortunately, a common mistake individuals make when they pay off debts is that you get back into the same position shortly thereafter. Don't make this mistake.

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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