Ted's Table

TB: The term "monthly valuation" is typically used to describe the process involved in updating participant accounts. Participant accounts for plans that are not updated each day are updated at specific intervals such as monthly or quarterly. The participant recordkeeping is usually performed on systems that do "balance forward accounting." All activity (contributions, distributions, investment income and investment gains) from one valuation period to the next is batch-processed at the end of the valuation period.

The investments held by the plan may actually be mutual funds that are updated each day. With this type of participant recordkeeping system, even if the actual investment funds are updated daily, the only updating of participant records is at the end of valuation period. The participant accounts are maintained solely as dollar values rather than as shares of the applicable funds. As a result, it is impossible to determine individual account values at any time other than on the actual valuation dates.

TB: Your wife would have the option, upon your death, to have your 401(k) account transferred directly to an IRA. If she does this, the IRA withdrawal rules will apply. She may also receive your benefit in a lump sum or in installments if your plan permits. Most 401(k) plans permit only lump sum payments. You should check with the person at your company who oversees your plan to find out whether your wife will be permitted to withdraw the money in installments.

If she will need to receive this money as a stream of income after you die, her best option may be to roll the money into an IRA and to take an "annuitized" form of payment. A representative from a mutual fund company should be able to explain exactly what she will need to do.

TB: Any money you contribute to a 401(k) from your after-tax income is taxed only once, prior to going into the plan. The investment income your earn on the money you contribute from your after-tax income is not taxed until you withdraw it from the plan. You get the benefit of tax-deferred growth. The other advantage you get is the automatic savings that occur through payroll deduction. Most of us lack the discipline to save as effectively if we have to do it on our own outside the plan.

TB: The options available to small employers wanting to set up a plan are very limited. Most providers are interested in plans that already have a sizable amount of assets because most of the income comes from the investment management fees.

One of the best alternatives is to establish a SIMPLE-IRA by working directly with a good mutual fund company. You'll be able to establish and operate a plan without any fees other than the regular investment management fee. But, you must contribute the applicable employer contribution.

TB: The marginal tax rate for a single taxpayer is 28% for all taxable income above $25,750. You will enjoy a 28% tax deferral for any amount you contribute. The maximum amount you're permitted to contribute to your 401(k) plan in 2000 is $10,500. However, that amount would have to be reduced if your employer also makes contributions to the plan. The reason is that combined employee/employer contributions may not exceed 25% of your pay.

The minimum amount I recommend contributing is the amount that's matched by your employer so you take full advantage of any employer contributions. If you're in the 40-plus age category and have limited retirement benefits accumulated, you should contribute as much as possible. Regardless of your age, you should use a retirement calculator to help you determine how much you need to save to meet your retirement goals if your haven't already take this step.

TB: I guess there is always something new. This is the first time I have heard of such a situation. Frankly, this sounds like a scheme that will permit the account holder to exceed the $10,500 maximum elective deferral (employee pre-tax) contribution limit without costing the employer any money (i.e. without the employer actually contributing money to the account). This is a most unusual arrangement and it clearly isn't within the intent of the law.

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

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.

Ted's Table

TB: The term "monthly valuation" is typically used to describe the process involved in updating participant accounts. Participant accounts for plans that are not updated each day are updated at specific intervals such as monthly or quarterly. The participant recordkeeping is usually performed on systems that do "balance forward accounting." All activity (contributions, distributions, investment income and investment gains) from one valuation period to the next is batch-processed at the end of the valuation period.

The investments held by the plan may actually be mutual funds that are updated each day. With this type of participant recordkeeping system, even if the actual investment funds are updated daily, the only updating of participant records is at the end of valuation period. The participant accounts are maintained solely as dollar values rather than as shares of the applicable funds. As a result, it is impossible to determine individual account values at any time other than on the actual valuation dates.

TB: Your wife would have the option, upon your death, to have your 401(k) account transferred directly to an IRA. If she does this, the IRA withdrawal rules will apply. She may also receive your benefit in a lump sum or in installments if your plan permits. Most 401(k) plans permit only lump sum payments. You should check with the person at your company who oversees your plan to find out whether your wife will be permitted to withdraw the money in installments.

If she will need to receive this money as a stream of income after you die, her best option may be to roll the money into an IRA and to take an "annuitized" form of payment. A representative from a mutual fund company should be able to explain exactly what she will need to do.

TB: Any money you contribute to a 401(k) from your after-tax income is taxed only once, prior to going into the plan. The investment income your earn on the money you contribute from your after-tax income is not taxed until you withdraw it from the plan. You get the benefit of tax-deferred growth. The other advantage you get is the automatic savings that occur through payroll deduction. Most of us lack the discipline to save as effectively if we have to do it on our own outside the plan.

TB: The options available to small employers wanting to set up a plan are very limited. Most providers are interested in plans that already have a sizable amount of assets because most of the income comes from the investment management fees.

One of the best alternatives is to establish a SIMPLE-IRA by working directly with a good mutual fund company. You'll be able to establish and operate a plan without any fees other than the regular investment management fee. But, you must contribute the applicable employer contribution.

TB: The marginal tax rate for a single taxpayer is 28% for all taxable income above $25,750. You will enjoy a 28% tax deferral for any amount you contribute. The maximum amount you're permitted to contribute to your 401(k) plan in 2000 is $10,500. However, that amount would have to be reduced if your employer also makes contributions to the plan. The reason is that combined employee/employer contributions may not exceed 25% of your pay.

The minimum amount I recommend contributing is the amount that's matched by your employer so you take full advantage of any employer contributions. If you're in the 40-plus age category and have limited retirement benefits accumulated, you should contribute as much as possible. Regardless of your age, you should use a retirement calculator to help you determine how much you need to save to meet your retirement goals if your haven't already take this step.

TB: I guess there is always something new. This is the first time I have heard of such a situation. Frankly, this sounds like a scheme that will permit the account holder to exceed the $10,500 maximum elective deferral (employee pre-tax) contribution limit without costing the employer any money (i.e. without the employer actually contributing money to the account). This is a most unusual arrangement and it clearly isn't within the intent of the law.

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

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.