Question: I live in Arizona and I'm getting a divorce. Can my husband legally claim any portion of the 401(k) contributions I made during our two-year marriage?

TB: There is a federal law that gives a spouse the right to claim all or a portion of a spouse's retirement benefits whenever a divorce occurs. This feature was added to the law primarily to protect female spouses of male employees who divorce their wives after accumulating substantial retirement benefits. It is intended to prevent an older person (the ex-spouse) from ending up with no retirement benefits. The law gives husband and wife the same rights.

The fact that your husband has a right to a portion of your 401(k) benefit doesn't guarantee that he will receive it. The specific outcome will be determined as part of your divorce settlement. If your husband is granted any benefits, it will be through what is known as a qualified domestic relations order. It is up to your attorney to get you the best possible settlement.

Question: My husband and I are retired. Next year, he will have to start taking distributions from his retirement plan. We haven't been able to find much information about the best options for this process. Can you recommend a good book or Web site that goes into detail on taking required minimum distributions and other distributions?

TB: I suggest you start at the most definitive source: the Internal Revenue Service. Click on "Search" at the bottom of the home page and type "minimum distributions" in the search field. I found 47 documents on this subject at that site — that should keep you busy for a while.

I also suggest you take a look at Publication 590, Individual Retirement Agreements. This book (which is free online) contains the basic rules outlining required distributions. You can reach the publication by clicking on "Forms and Pubs" at the bottom of the IRS home page.


By the way, the IRS also has a section where you can send in a question. You might want to give that a try if you have a specific tax question.

CCH Incorporated, a provider of tax and business law information, publishes the Retirement Benefits Tax Guide that is quite extensive. The price is $199.00 and the book number is 05185101. You can order it online or by calling (800) 980-9771.

Finally, when you are ready to decide how to take the money, I suggest you consult with a financial planner experienced in distribution planning. While on the surface many of these rules appear simple, the impact of your decisions could resonate throughout your retirement years and even affect your ability to pass on estate assets to your heirs.

Question: I've been with my 401(k) plan for more than one year, and I'm invested in five funds. I didn't notice any capital gains being reinvested at year-end. As an example, one of my funds declared short- and long-term capital gains about a week ago, yet the net asset value (NAV) dropped from $22 to $18 per share on the ex-div day. Where did those capital gains dollars go?

In my 401(k), I just see the loss because of the NAV drop and no money coming in or being reinvested. My plan administrator said there will be no reinvestment, I'll just have to be satisfied with this drop in the NAV. How do 401(k) plans handle capital gains distributions from a mutual fund? And, what about dividends?

TB: All investment income, including realized and unrealized capital gains, must stay in the plan and be allocated among the participants. Two specific issues are actually related to your question.

The first is whether the trustees of your plan established an automatic reinvestment arrangement when they opened the account for your company's plan with the fund company. Using investment income from a specific fund to purchase additional shares of that fund is the easiest method of having the investments for your account match your investment selection. As a result, the trustees have probably established an automatic reinvestment arrangement.

The second issue is how investment activity is reported to you and the other participants. The answer is governed by the type of recordkeeping system that is used by the organization that provides this service for your plan. Most recordkeepers use share-accounting systems, which provide exactly the same result you would expect if you were investing in the funds outside the plan. All activity for your account is tracked in actual shares reflecting the actual per-share price for each transaction. The additional shares acquired through the reinvestment of dividends and through capital gains would show directly in your account.

The other type of participant recordkeeping systems, still utilized by some 401(k) administrators, is dollar- rather than share-based. These systems are known as balance-forward systems. It is impossible with these systems to tie anything back to the underlying investments because all activity is reflected in dollars. Participant accounts are updated periodically with these systems, typically at the end of each quarter or month. All investment income, including realized and unrealized gains and losses, for the period is lumped together and allocated among the participant accounts using a number of assumptions.

With either system, all investment income, gains and losses are left in the plan and are allocated to the participant accounts. The share-accounting approach has a much greater degree of integrity because all activity takes place based upon the actual value at the time of each transaction. The dollar-based systems allocate investment gains and losses in a manner that is quite different from how they really occurred. I suspect from your comments that the administrator of your company's plan uses a dollar-based system.

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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