Ted's Table

Technical Terms Beneficiary Rollover Time horizon

TB: Thankfully, I have never claimed that I know everything there is to know about 401(k) because this is the first time I have heard of a k-plus program. I understand that you are the beneficiary of your father's plan and that you have your own 401(k) account. If your father is no longer living, you must decide what to do with the money that he left you as his beneficiary. I will assume your account is a result of your own employment on a part-time basis while you are attending college.

You must take the money from your father's account within the time period required by law and the applicable plan provisions. Your options will be impacted by whether your father died before or after he started to receive benefits and the distribution option he may have selected prior to his death. You will need to check with the person who oversees the plan that holds your father's account. You need to ask this individual when you must take the money out of the plan and what distribution options are available. The amount distributed to you will be fully taxable and it may not be rolled over into an IRA or another 401(k) plan. As a result, in my opinion, the decisions regarding your father's account will be limited to when you withdraw the money and whether you must take it as a lump sum or in installments. You must take it all within five years of your father's death unless your father died after benefit distributions commenced and he selected a payment option which will provide benefit payments to you over a longer period.

I assume your primary question, if you have a 401(k) account as a result of your own employment, is whether you can roll the benefit from your father's account to your account. Such a rollover is not permitted. If I am off the mark on your account and the two accounts you refer to are both from your father's 401(k) plan, then your options are governed totally by the provisions of your father's plan.

My advice to you is to first get the facts about the plan options from the plan representative. If you have difficulty understanding the options that are available and the financial implications, you should consider seeking help from a professional advisor. Also feel free to get back to me when you have more information.

TB: You lost your eligibility to contribute to the 401(k) plan when you and your fellow employees decided to join a union. The specific retirement benefits that are provided to union employees must be negotiated through the collective bargaining process. Employers may not include union employees in a 401(k), even if there aren't any employer contributions, unless the union employees and the employer agree to this benefit during the bargaining process. Apparently, continuing participation in the 401(k) was not of interest to you and the other union employees.

Your specific question relates to the amount you contributed to the 401(k) during the period you were eligible. Withdrawals during active employment prior to age 59½ are permitted only for an IRS-approved financial hardship. A change in employment status so that you are no longer eligible to contribute to the plan is not one of the legally acceptable reasons for in-service withdrawals. As a result, your money must stay in the plan until you leave the company, reach age 59½ or have a financial hardship.

TB: An option you may want to pursue, if this is truly a once-in-a-lifetime situation, is to ask your employer to split the bonus payment between 2000 and 2001 if this will enable you to keep your compensation under $85,000 for both years. If this is not a viable option, then you will be penalized during 2001 if you earn over $85,000 during 2000. However, the lower contribution level will apply only during 2001. You will be able to contribute a higher percentage in subsequent years unless this turns out not to be a once-in-a-lifetime experience for you.

You seem to have a fairly long time horizon before retirement. I recommend putting the additional amount you normally contribute to your 401(k) in a Roth IRA during 2001 and then into other after-tax investments. The important thing is to keep up your savings rate even if the tax break isn't as good.

TB: Putting the amount that is not matched into an IRA is a viable option; however, this will not produce the same tax benefits unless your adjusted gross income is low enough to permit deductible IRA contributions. The fact that contributions to the 401(k) are pretax is a big advantage. Also, most employees need the semiforced payroll deduction through a 401(k) to accomplish their savings goal. You should consider both points before she reduces her 401(k) contributions.

My first recommendation is for your wife to suggest to her employer to consider changing or expanding the investment options if the present ones are not satisfactory. The best way for her to do this is to explain in writing why the present funds are not satisfactory. My other recommendation, if she decides to reduce her contributions to the 401(k), is to contribute to a Roth IRA rather than a regular IRA, assuming that your adjusted gross income is above the range where you are eligible to make pretax IRA contributions. The Roth IRA is a better alternative when the contributions are not deductible because the investment income earned with the Roth IRA is never taxable, if you meet the requirements.

Related Readings Should a 401(k) Be Part of Your Union Contract? Roth IRA vs. 401(k): Which Plan Has the Advantage?

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

Technical Terms Beneficiary Rollover Time horizon

TB: Thankfully, I have never claimed that I know everything there is to know about 401(k) because this is the first time I have heard of a k-plus program. I understand that you are the beneficiary of your father's plan and that you have your own 401(k) account. If your father is no longer living, you must decide what to do with the money that he left you as his beneficiary. I will assume your account is a result of your own employment on a part-time basis while you are attending college.

You must take the money from your father's account within the time period required by law and the applicable plan provisions. Your options will be impacted by whether your father died before or after he started to receive benefits and the distribution option he may have selected prior to his death. You will need to check with the person who oversees the plan that holds your father's account. You need to ask this individual when you must take the money out of the plan and what distribution options are available. The amount distributed to you will be fully taxable and it may not be rolled over into an IRA or another 401(k) plan. As a result, in my opinion, the decisions regarding your father's account will be limited to when you withdraw the money and whether you must take it as a lump sum or in installments. You must take it all within five years of your father's death unless your father died after benefit distributions commenced and he selected a payment option which will provide benefit payments to you over a longer period.

I assume your primary question, if you have a 401(k) account as a result of your own employment, is whether you can roll the benefit from your father's account to your account. Such a rollover is not permitted. If I am off the mark on your account and the two accounts you refer to are both from your father's 401(k) plan, then your options are governed totally by the provisions of your father's plan.

My advice to you is to first get the facts about the plan options from the plan representative. If you have difficulty understanding the options that are available and the financial implications, you should consider seeking help from a professional advisor. Also feel free to get back to me when you have more information.

TB: You lost your eligibility to contribute to the 401(k) plan when you and your fellow employees decided to join a union. The specific retirement benefits that are provided to union employees must be negotiated through the collective bargaining process. Employers may not include union employees in a 401(k), even if there aren't any employer contributions, unless the union employees and the employer agree to this benefit during the bargaining process. Apparently, continuing participation in the 401(k) was not of interest to you and the other union employees.

Your specific question relates to the amount you contributed to the 401(k) during the period you were eligible. Withdrawals during active employment prior to age 59½ are permitted only for an IRS-approved financial hardship. A change in employment status so that you are no longer eligible to contribute to the plan is not one of the legally acceptable reasons for in-service withdrawals. As a result, your money must stay in the plan until you leave the company, reach age 59½ or have a financial hardship.

TB: An option you may want to pursue, if this is truly a once-in-a-lifetime situation, is to ask your employer to split the bonus payment between 2000 and 2001 if this will enable you to keep your compensation under $85,000 for both years. If this is not a viable option, then you will be penalized during 2001 if you earn over $85,000 during 2000. However, the lower contribution level will apply only during 2001. You will be able to contribute a higher percentage in subsequent years unless this turns out not to be a once-in-a-lifetime experience for you.

You seem to have a fairly long time horizon before retirement. I recommend putting the additional amount you normally contribute to your 401(k) in a Roth IRA during 2001 and then into other after-tax investments. The important thing is to keep up your savings rate even if the tax break isn't as good.

TB: Putting the amount that is not matched into an IRA is a viable option; however, this will not produce the same tax benefits unless your adjusted gross income is low enough to permit deductible IRA contributions. The fact that contributions to the 401(k) are pretax is a big advantage. Also, most employees need the semiforced payroll deduction through a 401(k) to accomplish their savings goal. You should consider both points before she reduces her 401(k) contributions.

My first recommendation is for your wife to suggest to her employer to consider changing or expanding the investment options if the present ones are not satisfactory. The best way for her to do this is to explain in writing why the present funds are not satisfactory. My other recommendation, if she decides to reduce her contributions to the 401(k), is to contribute to a Roth IRA rather than a regular IRA, assuming that your adjusted gross income is above the range where you are eligible to make pretax IRA contributions. The Roth IRA is a better alternative when the contributions are not deductible because the investment income earned with the Roth IRA is never taxable, if you meet the requirements.

Related Readings Should a 401(k) Be Part of Your Union Contract? Roth IRA vs. 401(k): Which Plan Has the Advantage?

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.