Ted's Table

Technical Terms Beneficiary Individual retirement account (IRA) Mutual fund

TB: You will have to report the amount you receive as additional taxable income and pay the applicable income tax. The liability for the federal estate and any state inheritance taxes must be paid from the assets of the estate. The assets are normally divided among the various beneficiaries after the estate and inheritance taxes have been paid. The will may contain specific instructions for the payment of these taxes. The settling of the estate, including the payment of taxes, is the responsibility of the executor. The executor is commonly granted specific powers and instructions within the will and must follow the terms of the will. The estate settlement process is governed by the laws of the state when the deceased does not have a will.

You should keep in touch with the executor. You should also consider retaining your own legal advisor if you have any reservations about how the estate is being handled by the executor.

TB: Your wife will have essentially the same options you have if your money is still in the plan at the time of your death, unless you have selected a specific option while you are still living which restricts her options. For example, some plans permit participants to select a specific form of benefit payment which is binding upon the beneficiary. If you haven't made a binding benefit selection, your spouse should be able to leave the money in the plan or transfer it to an IRA.

Your plan may also permit your wife to take the money out in a lump sum or in installments over a number of years. However, most employers don't want to be bothered with periodic distributions so she may be limited to a lump sum payment.

I recommend transferring the money directly to an IRA rather than leaving it in the 401(k) because this will give her greater flexibility and control. She can either obtain a guaranteed income for life by transferring it into an IRA annuity or she can take a fixed amount out each month if she rolls the money into an IRA using mutual funds. She can increase or decrease her distributions from an IRA with mutual funds, but there isn't a lifetime income guarantee.

It can be difficult when the money is left in the 401(k) plan to find the person who oversees the plan years later to get the money out. The constant restructuring of companies can make it very difficult to keep track of your money. I am personally having difficulty with a benefit from a pension plan because my former employer has been sold twice since I left.

TB: There are specific rules issued by the Treasury Department which must be followed whenever all or a portion of a business is sold. These rules have been modified recently so that employees who are impacted by such changes can be treated as terminated employees in most instances. These new rules may apply to your situation which means that what you have been told would be correct. One of the major disadvantages of 401(k) loans is the fact that the unpaid balance becomes taxable upon termination of employment unless the employer is willing to permit payments to continue after termination of employment.

Those of you who are in this situation can ask the company that is selling your department to allow you to continue repaying the loan. Most employers don't want to do this because they have to manually process each loan payment when they receive a personal check rather than having repayment occur via payroll deduction. This administrative expense can be reduced if you are willing to make quarterly loan payments.

Related Reading Your Company Was Acquired! What Happens to Your 401(k) Money? Tax Considerations When You Inherit a 401(k): Part Two

Another possibility is to transfer your account, including the loan, to your new employer's plan, if they have one. Another alternative, if your new employer doesn't have a plan, is to ask them to deduct loan payments from your pay for those of you who have loans, and for the employer to electronically submit the applicable money and information to your old employer. Of course, your old employer must agree to this arrangement. Both your old and new employer should have some interest in helping employees who have loans resolve this problem, so give it a shot.

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 Individual retirement account (IRA) Mutual fund

TB: You will have to report the amount you receive as additional taxable income and pay the applicable income tax. The liability for the federal estate and any state inheritance taxes must be paid from the assets of the estate. The assets are normally divided among the various beneficiaries after the estate and inheritance taxes have been paid. The will may contain specific instructions for the payment of these taxes. The settling of the estate, including the payment of taxes, is the responsibility of the executor. The executor is commonly granted specific powers and instructions within the will and must follow the terms of the will. The estate settlement process is governed by the laws of the state when the deceased does not have a will.

You should keep in touch with the executor. You should also consider retaining your own legal advisor if you have any reservations about how the estate is being handled by the executor.

TB: Your wife will have essentially the same options you have if your money is still in the plan at the time of your death, unless you have selected a specific option while you are still living which restricts her options. For example, some plans permit participants to select a specific form of benefit payment which is binding upon the beneficiary. If you haven't made a binding benefit selection, your spouse should be able to leave the money in the plan or transfer it to an IRA.

Your plan may also permit your wife to take the money out in a lump sum or in installments over a number of years. However, most employers don't want to be bothered with periodic distributions so she may be limited to a lump sum payment.

I recommend transferring the money directly to an IRA rather than leaving it in the 401(k) because this will give her greater flexibility and control. She can either obtain a guaranteed income for life by transferring it into an IRA annuity or she can take a fixed amount out each month if she rolls the money into an IRA using mutual funds. She can increase or decrease her distributions from an IRA with mutual funds, but there isn't a lifetime income guarantee.

It can be difficult when the money is left in the 401(k) plan to find the person who oversees the plan years later to get the money out. The constant restructuring of companies can make it very difficult to keep track of your money. I am personally having difficulty with a benefit from a pension plan because my former employer has been sold twice since I left.

TB: There are specific rules issued by the Treasury Department which must be followed whenever all or a portion of a business is sold. These rules have been modified recently so that employees who are impacted by such changes can be treated as terminated employees in most instances. These new rules may apply to your situation which means that what you have been told would be correct. One of the major disadvantages of 401(k) loans is the fact that the unpaid balance becomes taxable upon termination of employment unless the employer is willing to permit payments to continue after termination of employment.

Those of you who are in this situation can ask the company that is selling your department to allow you to continue repaying the loan. Most employers don't want to do this because they have to manually process each loan payment when they receive a personal check rather than having repayment occur via payroll deduction. This administrative expense can be reduced if you are willing to make quarterly loan payments.

Related Reading Your Company Was Acquired! What Happens to Your 401(k) Money? Tax Considerations When You Inherit a 401(k): Part Two

Another possibility is to transfer your account, including the loan, to your new employer's plan, if they have one. Another alternative, if your new employer doesn't have a plan, is to ask them to deduct loan payments from your pay for those of you who have loans, and for the employer to electronically submit the applicable money and information to your old employer. Of course, your old employer must agree to this arrangement. Both your old and new employer should have some interest in helping employees who have loans resolve this problem, so give it a shot.

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.