Question: It seems like I've been losing money in
my 401(k) plan. Too many of the
investment options I choose are the wrong ones. How do you know the correct places to
allocate?
TB: It's somewhat difficult to respond without more detailed information but I'll do my
best. First,
when you allocate your money among a number of different types of funds, you need to
accept the
fact that some will do much better than others during any year. In fact during a year when
one fund
may be up by more than 20%, another fund might lose money.
For example, most 401(k) plans offer an international fund. Most international funds
haven't done
well during the last couple of years. An investor might react to these results by pulling
his/her money
out of the international fund. This could be a big mistake because many experts think
international
stocks will do well during the next couple of years.
The U.S. stock market also produces conflicting results. Stocks don't all go up and down
at the
same time. For example, on a day when the Dow Jones Industrial Average of 30 stocks rises,
we
still might see the broader market fall because a greater number of other stocks decline.
The market
goes through cycles. During a cycle, one type of stock will do much better than other
types.
Some examples of different types of stocks are large-cap value, large-cap growth, mid-cap
value or
growth, small-cap value or growth, sectors stocks like tech companies, etc. When you
invest in a
fund, you should know what type of stocks the fund manager buys. Your goal should be to
allocate
your money across this broad spectrum of stocks including some bonds and/or a stable-value
fund.
The best alternative is to use the services of a registered investment advisor to help you
select your
funds. If you don't have access to that type of service, the next best alternative is to
seek help from
the resources available to you from the financial organization that manages your company's
401(k).
Once you establish your allocation strategy, stick with it. Successful investing requires
patience over
long periods of time. Moving money from fund to fund based upon short-term results is
likely to
lead to failure and frustration.
Question: How can I locate a 401(k) plan that I had at a former place of
employment that
no longer exists?
TB: Your former employer should have filed a report concerning your account with the IRS.
The
IRS then forwards that report to the Social Security Administration. You should be able to
obtain
that information from Social Security's customer service department by calling
1-800-772-1213, or
at their web site at: http://www.ssa.gov/service.html
Another possibility is to contact the financial organization that handled the plan, if you
have this
information. You should also contact anyone you know from your former employer to see if
they
can help.
Question: I'm 56 years old and will retire soon. If I elect to take a lump sum out
of my
pension plan (e.g., $500,000) and roll over $450,000 to an IRA, and take $50,000 in
distributions, will the distribution be exempt from the 10% penalty in the same way it
would be if it were being taken from my 401(k) plan?
TB: The $50,000 you take as a distribution won't be subject to the 10% tax penalty if you
leave
your employer after attaining age 55. This amount will be taxable as ordinary income. You
should
consider taking this distribution during a year when you have little or no earned income.
Question: Three years ago I was laid off from my job. At that time I had a 401(k)
loan that
was being repaid. When I got laid off, I was told to repay the entire loan balance, which
I
did. In the meantime, the balance that I had in the account was moved to an IRA. The
company that I worked for has shown the repaid loan as outstanding (it never gave me
credit for the $2,300 plus repayment), plus they finally paid their contribution (almost
$400). This totals almost $2,900 that has been sitting in their account for three years.
Currently the company is in bankruptcy and my 401(k) dollars are in limbo. If I'm unable
to recoup my $2,900, is this a loss I can claim on my tax return?
TB: If the loan wasn't repaid, you would have been required to pay tax on the unpaid loan
balance.
Apparently this money and the last $400 the employer contributed were never put into the
plan by
your former employer. If this is correct, you are a creditor. It will take a while before
the situation is
ultimately resolved. Your claim will have a high priority in the bankruptcy proceedings so
you may
eventually get some or all of your money. If you don't get it, I'm not certain whether you
will be able
to claim this loss as a tax deduction.
You never paid tax on the $400 that your employer contributed, so I don't think you can
deduct it.
The loan repayment is different because it came from your after-tax income. You should
consult
your personal tax advisor regarding the potential deductibility of this loss and when
would be the
proper time to claim the deduction.
Question: I took out a loan from my 401(k). Can I roll over my traditional IRA
into the
401(k) to pay off the loan?
TB: Rollovers from a traditional IRA to a 401(k) are permitted only if the money in this
account is
from another tax-qualified, employer-sponsored retirement plan (sometimes referred to as a
"conduit IRA"). You aren't permitted to roll this money into the 401(k) if it
contains any IRA
contributions.
When you do such a transfer, your employer will treat this amount as a rollover rather
than a loan
repayment. They will retain the unpaid loan balance on the plan records as an amount you
must
continue to repay from your after-tax income.
Question: Regarding your answer in the December 6, 1999 Ted's Table to the first
question about whether an employer will allow a 55-year old downsized employee to only
take lump-sum distribution of his 401(k) plan. Wouldn't it be possible for this employee
to
roll the 401(k) to an IRA and then take 'substantially equal' annuitized distributions
from
the IRA for five years, then revert to withdrawals as needed from the IRA?
TB: You're correct that substantially equal annuitized distributions for five years from
the IRA would
work. The response I gave was based upon my perception that the person who asked the
question
didn't want to get involved with an annutized payment structure.
 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.
|
