Ted's Table

TB: With a money-purchase plan, the employer is required to contribute the amount defined in the plan. For example, if the contribution is equal to 5% of pay, the employer must contribute 5% of your pay to the plan. You aren't permitted to receive cash in lieu of the pension benefit. By the way, millions of employees would be thrilled to have their employer make such a contribution to a retirement plan for them.

The employer has full authority to select the financial institution and to control how this money is invested. It may also give participants the right to direct how this money will be invested, similar to the way most 401(k) plans operate, but it isn't required to do so. Money may not be withdrawn from a money-purchase plan until you leave your employer.

TB: The answer depends upon the way the plan document is written. Your employer is required to continue making matching contributions after you stop contributing due to the $10,000 maximum, unless the document specifies that matching contributions will be made only during the period you are contributing. Most documents simply specify that the employer will match a certain percentage of pay. Your plan provides for a 50% match up to the first 6% of pay you contribute. Your employer should contribute 3% of your pay to the plan if you are employed for the entire year regardless of when you contribute your 6%, unless the document specifies that matching contributions will be made only during those pay periods when you contribute.

Many employers erroneously make matching contributions only for the period when an employee contributes either because they don't know better or because it is much easier to operate the plan in this manner. You're being penalized because you're putting your maximum contribution in the plan at a faster rate than 6% per pay period. An employee who does the reverse, that is, puts his contribution in during the last couple of months of the year, would have the same problem.

The amount of matching contributions employees receive shouldn't be governed by when they choose to make their contributions during the year. I suggest giving this answer to the person at your company who is responsible for overseeing your plan.

TB: A variable annuity is an investment vehicle. A 401(k) is a tax-qualified retirement plan. Contributions to a 401(k) plan may be invested in a variable annuity. Individuals may also buy variable annuities just like individuals may invest in mutual funds either inside a 401(k) or outside a 401(k).

You're permitted to put money into a 401(k) only if your employer offers this plan. If your employer offers a 401(k) and you haven't been contributing, putting your money into it should be a much better way to save for retirement than the variable annuity.

Here's why: First, the money you put into a 401(k) is pre-tax. Money you invest in a variable annuity outside a qualified retirement plan comes from your after-tax income. Next, your employer may match the contributions you put into a 401(k). The fees related to the investments in your 401(k) plan are usually considerably less than those with a variable annuity. You should be able to stop putting money into the variable annuity without triggering any penalties, however you cannot roll the money from the variable annuity into the 401(k). Leave the money you have already invested in the variable annuity and start contributing to a 401(k) if you are eligible to do so.

TB: The only way to make contributions to a 401(k) is by having the money deducted from your paycheck. The fact that you were eligible to make contributions to a 401(k) for a portion of this year will affect your opportunity to make a tax-deductible contribution to an IRA. You will be able to do so only if your adjusted gross income is below the applicable threshold.

Frankly, I don't think there's much you can do at this stage to reduce the tax bite; however, you may want to seek advice from a personal tax expert.

TB: Legally pre-tax contributions to a 401(k) must be made via payroll deduction. There isn't any other alternative. Continue putting money into your IRAs and other investments such as mutual funds.

TB: The investment return you can expect to receive over the long haul will be determined by the manner in which you decide to invest your money. You will receive the largest return over the next 20 years by investing most of your money in stock or growth funds; however, you must accept the ups and downs that occur with this type of investment. There will be periods when the value of your account drops. You need to hang in there during these periods to achieve the best results. You should expect an average annual return in the 9% to 10% range if you invest in this manner for a period of 20 years. Returns with this type of investment have been higher during the last few years, but you shouldn't expect a higher return.

Regarding the amount you'll need when you retire, you're doing a great job by saving the maximum amount. Keep it up. The best way to determine whether you'll have enough is to use one or more of the retirement calculators that are readily available on the Internet. To estimate how much your 401(k) plan will be worth when you retire, you can use the 401(k)alculator on this web site.

It takes a lot to retire at age 56 to provide the income you will need for 25-plus years particularly when you include the cost of medical care.

By the way, you mention that your plan does not include an employer match. For whatever it's worth, when employees are covered by a collective bargaining agreement, the employer can only offer a 401(k) plan that has been agreed on by both parties. The company could be cited for a violation of the labor laws if it offered you a 401(k) plan other than through the bargaining process. Therefore, the employer may not provide a matching contribution unless this is included in the labor contract which your union negotiations with the company. If you want a matching contribution, your union must include this request during the next contract negotiations. Of course, your fellow workers must also want an employer matching contribution more than a wage increase or some other benefit.

Ted Benna, creator of the first 401(k) retirement savings plan, will answer your most intriguing questions every Monday. 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: With a money-purchase plan, the employer is required to contribute the amount defined in the plan. For example, if the contribution is equal to 5% of pay, the employer must contribute 5% of your pay to the plan. You aren't permitted to receive cash in lieu of the pension benefit. By the way, millions of employees would be thrilled to have their employer make such a contribution to a retirement plan for them.

The employer has full authority to select the financial institution and to control how this money is invested. It may also give participants the right to direct how this money will be invested, similar to the way most 401(k) plans operate, but it isn't required to do so. Money may not be withdrawn from a money-purchase plan until you leave your employer.

TB: The answer depends upon the way the plan document is written. Your employer is required to continue making matching contributions after you stop contributing due to the $10,000 maximum, unless the document specifies that matching contributions will be made only during the period you are contributing. Most documents simply specify that the employer will match a certain percentage of pay. Your plan provides for a 50% match up to the first 6% of pay you contribute. Your employer should contribute 3% of your pay to the plan if you are employed for the entire year regardless of when you contribute your 6%, unless the document specifies that matching contributions will be made only during those pay periods when you contribute.

Many employers erroneously make matching contributions only for the period when an employee contributes either because they don't know better or because it is much easier to operate the plan in this manner. You're being penalized because you're putting your maximum contribution in the plan at a faster rate than 6% per pay period. An employee who does the reverse, that is, puts his contribution in during the last couple of months of the year, would have the same problem.

The amount of matching contributions employees receive shouldn't be governed by when they choose to make their contributions during the year. I suggest giving this answer to the person at your company who is responsible for overseeing your plan.

TB: A variable annuity is an investment vehicle. A 401(k) is a tax-qualified retirement plan. Contributions to a 401(k) plan may be invested in a variable annuity. Individuals may also buy variable annuities just like individuals may invest in mutual funds either inside a 401(k) or outside a 401(k).

You're permitted to put money into a 401(k) only if your employer offers this plan. If your employer offers a 401(k) and you haven't been contributing, putting your money into it should be a much better way to save for retirement than the variable annuity.

Here's why: First, the money you put into a 401(k) is pre-tax. Money you invest in a variable annuity outside a qualified retirement plan comes from your after-tax income. Next, your employer may match the contributions you put into a 401(k). The fees related to the investments in your 401(k) plan are usually considerably less than those with a variable annuity. You should be able to stop putting money into the variable annuity without triggering any penalties, however you cannot roll the money from the variable annuity into the 401(k). Leave the money you have already invested in the variable annuity and start contributing to a 401(k) if you are eligible to do so.

TB: The only way to make contributions to a 401(k) is by having the money deducted from your paycheck. The fact that you were eligible to make contributions to a 401(k) for a portion of this year will affect your opportunity to make a tax-deductible contribution to an IRA. You will be able to do so only if your adjusted gross income is below the applicable threshold.

Frankly, I don't think there's much you can do at this stage to reduce the tax bite; however, you may want to seek advice from a personal tax expert.

TB: Legally pre-tax contributions to a 401(k) must be made via payroll deduction. There isn't any other alternative. Continue putting money into your IRAs and other investments such as mutual funds.

TB: The investment return you can expect to receive over the long haul will be determined by the manner in which you decide to invest your money. You will receive the largest return over the next 20 years by investing most of your money in stock or growth funds; however, you must accept the ups and downs that occur with this type of investment. There will be periods when the value of your account drops. You need to hang in there during these periods to achieve the best results. You should expect an average annual return in the 9% to 10% range if you invest in this manner for a period of 20 years. Returns with this type of investment have been higher during the last few years, but you shouldn't expect a higher return.

Regarding the amount you'll need when you retire, you're doing a great job by saving the maximum amount. Keep it up. The best way to determine whether you'll have enough is to use one or more of the retirement calculators that are readily available on the Internet. To estimate how much your 401(k) plan will be worth when you retire, you can use the 401(k)alculator on this web site.

It takes a lot to retire at age 56 to provide the income you will need for 25-plus years particularly when you include the cost of medical care.

By the way, you mention that your plan does not include an employer match. For whatever it's worth, when employees are covered by a collective bargaining agreement, the employer can only offer a 401(k) plan that has been agreed on by both parties. The company could be cited for a violation of the labor laws if it offered you a 401(k) plan other than through the bargaining process. Therefore, the employer may not provide a matching contribution unless this is included in the labor contract which your union negotiations with the company. If you want a matching contribution, your union must include this request during the next contract negotiations. Of course, your fellow workers must also want an employer matching contribution more than a wage increase or some other benefit.

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