Question: There are at least three ways to start withdrawals from a 401(k) plan, before reaching age 59ý, without penalty. Can you provide any references?

TB: You're correct. There are three ways for you to take your money out of a 401(k) prior to age 59ý without having to pay the 10 percent early distribution penalty tax. These are as follows:

1. Leave your employer after attaining age 55,
2. Take an annuity form of distribution, or
3. If you are disabled as defined in the Internal Revenue Code.

To qualify under the disability provision, the disability must prevent you from performing any services and be expected to result in death.

Question: Being a foreign worker in this country, what are the pros and cons for participating in a 401(k) plan, knowing that I have a limit of six years to work here?

TB: The benefits of participating in a 401(k) are the same for a foreign worker as any other employee. These are as follows:

1. Everyone needs to save for retirement.
2. The semiautomatic savings that occurs via payroll deduction is the easiest way to save.
3. Contributing to a 401(k) reduces your current tax burden.
4. You will benefit from the employer-matching contribution, if your plan has one.
5. Your contributions and the employer contributions will benefit from tax-deferred growth until you withdraw the money.

You will have the added advantage of being able to withdraw the money after you return home during a year or years when you have no other taxable U.S. income, even if you have income in your home nation. This means your tax rate for the 401(k) money may be in one of the lower brackets. However, you will still be subject to early withdrawal rules before age 59ý.

Question: I recently started a new job. I won't be allowed to participate in my new employer's plan or roll over a previous 401(k) balance until one year has passed. What options exist to allow a pre-tax deduction for retirement savings while I'm in this 'waiting period'? Somehow, not being able to participate (even unmatched, unvested ...) in pre-tax retirement savings for the next year doesn't seem right.

TB: You're trapped and there isn't a lot you can do, other than to encourage your new employer to reduce the one-year waiting period. Many employers have reduced the waiting period for new employees from one year to 90 days or less to help attract good employees. Many employees who move from one company to another don't want to wait for a year or more before they can join the 401(k) plan.

One saving alternative for you to consider is an IRA. You may not be able to make tax-deductible contributions to a traditional IRA, depending on your income level. The income limits apply if you were eligible for a 401(k) during any part of the tax year, which seems to be your case.

If you cannot make deductible contributions to a traditional IRA, this gives you an excellent opportunity to make an after-tax contribution to a Roth IRA, if you qualify. The investment income you earn with the Roth will never be taxed, if you follow the rules.

For more about Roth and traditional IRA rules, I suggest that you visit the IRAjunction.

One other thought, when you are finally eligible to participate in your new employer's 401(k) plan, you could always try to boost your contributions to make up for the lost time, providing you stay within the contribution limits. Then, next year, you can reduce the paycheck deferral to a more reasonable level.

Any additional savings should be invested into mutual funds or some other investment vehicle until you become 401(k) eligible. Another possibility is to use your current situation to pay off high interest debt, if you have any.

Question: Can you make a suggestion as to where I can locate information on a QDR Security Order?

TB: I believe you are referring to a qualified domestic relations order, commonly referred to as a QDRO. This is a provision of the tax code that provides protection to former spouses and children of employees covered by qualified retirement plans. This provision of the law gives these individuals the right to claim all or a portion of an employee's retirement benefits as part of a divorce settlement.

The QDRO provisions were enacted by Congress as a part of the Retirement Equity Act of 1998. Since then, Congress has amended the QDRO provisions several times to clarify and expand the benefits available to beneficiaries under those orders. You can get detailed information from a law library or other library that has a copy of the Internal Revenue Code and applicable regulations. These will be tough to read so you may want to find something easier. A good alternative is the Department of Labor. Here's how to access their information:

1. Go to their web site,
2. Click on DOL Agencies on the left side of the page,
3. Click on Pension and Welfare Benefits Administration (PWBA),
4. Click on Consumer Information on Pension Plans, which you will find at the bottom of the PWBA page, and
5. Click on "QDRO's: The Division of Pensions through Qualified Domestic Relations Orders."

Question: I'm 71 years old and a more-than-5-percent owner in the company at which I am still employed. At this time, I'm required to begin taking minimum required distributions from my 401(k). Can I continue to make contributions at this time? If I've already contributed for this year, do I need to withdraw the amount that I contributed?

TB: You may continue to contribute to your 401(k) as long as you are an active employee, so the amount you have contributed can stay in the plan. You must also withdraw the minimum amount required. Making additional contributions will increase the amount you must withdraw but it may still be advantageous to make contributions.

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

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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