Ted's Table

TB: It costs a company to have a 401(k) plan even if there aren't any employer contributions. The employer must pay the fees associated with starting the plan. The employer must also pay the administrative fees, at least during the first few years, because the plan assets are not sufficient to make withdrawing these fees from the plan financially viable. The company is able to deduct these fees as a business expense but that covers only a relatively small portion of the actual costs.

Additionally, there are indirect costs. A staff member must spend a lot of time overseeing the 401(k), even if your employer hires a good third-party administrator. The employer also assumes certain liability to offer a plan that is in the best interests of its employees. For example, some participants have sued their employer because they didn't like the way the plan was managed.

If there is an employer contribution, this also increases the cost. The employer's contribution to the plan is a tax-deductible business expense but again this covers only part of the cost. For example, if the employer contribution is $10,000 and the applicable corporate tax rate is 15%, the tax break is equal to $1,500, leaving a net after-tax-cost of $8,500.

Bottom line: It costs money for an employer to offer a 401(k), even if there isn't any employer contribution. Employers offer plans to help their employees save for retirement and because they may have difficulty hiring and retaining good employees without one.

TB: The ordinary life-annuity factor at age 51 for one life is 32.20. You must divide your account balance by this factor to get the annual distribution. For example, if your 401(k) balance is $100,000, the annual distribution would be $3,105.59.

You may use the two-life factor if you have a spouse. This will result in a smaller annual distribution, though.

You will be able to take annual annuity distributions from your plan only if your employer's plan permits this type of withdrawal. Most 401(k) plans require you to take your money in a lump sum. If this is the only option with your plan, you will need to roll your money directly into an IRA and then structure your annuity distribution from the IRA.

TB: Most of our tax laws are dependent upon voluntary compliance, with a little fear of the big, bad IRS thrown in to get our attention.

Regarding the specific points you raised, I'm not aware of any monitoring system. Of course, taxes will ultimately be collected on your IRA holdings, it is simply a matter of when. Given this fact, it doesn't make sense to spend a lot of money monitoring distributions from these accounts.

Regarding your second question, I'm not an expert in IRAs. You will need to call a firm that regularly deals with IRA accounts to find out how they handle this.

TB: The law has been changed by repealing the penalty tax for having too much accumulated, so you don't need to worry about that issue; however, it still may be advisable for you to funnel more of your future savings outside the plan.

Accumulating money in tax-deferred vehicles, substantially in excess of what you are likely to need for your retirement, has a down side. The amount left when you die will be subject to Federal income and estate taxes. The combination of these taxes can take 70% to 80% of what is left. I would strongly recommend discussing your alternatives with a qualified, independent professional who is familiar with both qualified retirement plans and estate planning.

TB: The $10,000 is not taxable provided the rollover was handled properly. You should report the total distribution on line 16(a) of your Form 1040 tax return and report the taxable portion on line 16(b).

The taxable portion will be subject to the 10% early distribution penalty if your wife is under age 59½. The tax payable is reported on line 48 of Form 1040. You may also have to include a Form 5329.

TB: Leaving the money in the plan is a reasonable alternative if you are comfortable with the investment arrangements. However, things can change rather quickly. Your former employer could be acquired and all the money in the current plan could be moved to the buyer's plan. Your former employer could also decide to totally change investment options at any time. In both of these situations, there usually is a transition period during which no changes (e.g., withdrawals, investment transfers, etc.) may occur. I would leave my money in the plan, only if I had a high level of comfort that such changes were not likely in the foreseeable future.

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: It costs a company to have a 401(k) plan even if there aren't any employer contributions. The employer must pay the fees associated with starting the plan. The employer must also pay the administrative fees, at least during the first few years, because the plan assets are not sufficient to make withdrawing these fees from the plan financially viable. The company is able to deduct these fees as a business expense but that covers only a relatively small portion of the actual costs.

Additionally, there are indirect costs. A staff member must spend a lot of time overseeing the 401(k), even if your employer hires a good third-party administrator. The employer also assumes certain liability to offer a plan that is in the best interests of its employees. For example, some participants have sued their employer because they didn't like the way the plan was managed.

If there is an employer contribution, this also increases the cost. The employer's contribution to the plan is a tax-deductible business expense but again this covers only part of the cost. For example, if the employer contribution is $10,000 and the applicable corporate tax rate is 15%, the tax break is equal to $1,500, leaving a net after-tax-cost of $8,500.

Bottom line: It costs money for an employer to offer a 401(k), even if there isn't any employer contribution. Employers offer plans to help their employees save for retirement and because they may have difficulty hiring and retaining good employees without one.

TB: The ordinary life-annuity factor at age 51 for one life is 32.20. You must divide your account balance by this factor to get the annual distribution. For example, if your 401(k) balance is $100,000, the annual distribution would be $3,105.59.

You may use the two-life factor if you have a spouse. This will result in a smaller annual distribution, though.

You will be able to take annual annuity distributions from your plan only if your employer's plan permits this type of withdrawal. Most 401(k) plans require you to take your money in a lump sum. If this is the only option with your plan, you will need to roll your money directly into an IRA and then structure your annuity distribution from the IRA.

TB: Most of our tax laws are dependent upon voluntary compliance, with a little fear of the big, bad IRS thrown in to get our attention.

Regarding the specific points you raised, I'm not aware of any monitoring system. Of course, taxes will ultimately be collected on your IRA holdings, it is simply a matter of when. Given this fact, it doesn't make sense to spend a lot of money monitoring distributions from these accounts.

Regarding your second question, I'm not an expert in IRAs. You will need to call a firm that regularly deals with IRA accounts to find out how they handle this.

TB: The law has been changed by repealing the penalty tax for having too much accumulated, so you don't need to worry about that issue; however, it still may be advisable for you to funnel more of your future savings outside the plan.

Accumulating money in tax-deferred vehicles, substantially in excess of what you are likely to need for your retirement, has a down side. The amount left when you die will be subject to Federal income and estate taxes. The combination of these taxes can take 70% to 80% of what is left. I would strongly recommend discussing your alternatives with a qualified, independent professional who is familiar with both qualified retirement plans and estate planning.

TB: The $10,000 is not taxable provided the rollover was handled properly. You should report the total distribution on line 16(a) of your Form 1040 tax return and report the taxable portion on line 16(b).

The taxable portion will be subject to the 10% early distribution penalty if your wife is under age 59½. The tax payable is reported on line 48 of Form 1040. You may also have to include a Form 5329.

TB: Leaving the money in the plan is a reasonable alternative if you are comfortable with the investment arrangements. However, things can change rather quickly. Your former employer could be acquired and all the money in the current plan could be moved to the buyer's plan. Your former employer could also decide to totally change investment options at any time. In both of these situations, there usually is a transition period during which no changes (e.g., withdrawals, investment transfers, etc.) may occur. I would leave my money in the plan, only if I had a high level of comfort that such changes were not likely in the foreseeable future.

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.