Ted's Table

TB: Unfortunately, there aren't any legal time limits for distributing your 401(k) money when you leave the employer prior to retirement age. Legally, a plan may be established requiring you to wait until retirement age to get your money. The best advice I can offer is to become familiar with the benefit payment process before you leave the company. Complete the applicable paperwork that's required to trigger the distribution process as soon as possible after you leave the employer. Submit what's required and keep after the applicable contact until you receive your money.

TB: A key factor is the level of employer matching contributions. You should do everything possible to continue contributing to your 401(k) at the level that is matched by your employer.

I recommend borrowing the down payment if you can afford to repay the loan, pay the home mortgage and continue contributing to your 401(k) plan. If this won't be possible, I would consider taking a hardship withdrawal from the plan when you buy the home. The best way to do this is to buy the home and take the withdrawal at the beginning of the year. The tax break that you receive from owning the home will offset all or most of the tax that is generated by taking the hardship withdrawal. It's important to buy the home at the beginning of the year to get the largest tax break. You will be required to suspend your contributions for one year when you take the hardship withdrawal unless your employer's plan permits you to show that the withdrawal is required because you don't have any other funds available. If you're required to suspend your contributions at this point, the tax breaks provided by home ownership will help you offset the increased tax resulting from your lack of 401(k) contributions.

TB: The answer to your first question depends upon what portion of the loan was reported as taxable income during 1998. If the entire unpaid loan balance was reported as taxable income during 1998, he won't have any additional tax to pay during 1999. If he reported only the amount that should have been repaid during 1998 on his 1998 return, then he will have to report as taxable income during 1999 the amount that should have been repaid in 1999. To answer your second question, the amount that isn't repaid in a timely manner is considered a taxable distribution and must be reported as taxable income.

TB: There are a number of reasons why 401(k) investments are restricted to certain types of investments. First, some specific types of investments such as collectibles are legally prohibited. Employers also limit the types of investments they permit for liability and administrative reasons. Employers retain some fiduciary responsibility even when investment control is delegated to the participants. For example, there's a risk of being sued if they permit investments that are considered to be inappropriate for this type of plan. A venture or incubator fund could be considered by many to be an inappropriate investment vehicle for a 401(k) plan.

Administratively, it also isn't desirable to use investments that aren't readily marketable. Venture capital or incubator funds generally aren't open to small investors and most are illiquid. Establishing a market value can be very difficult. These are all reasons why most employers don't want to offer these types of funds.

TB: The representative who advised you to consider the eventual tax consequences of your decision gave you good advice. Financial planners generally recommend selling company stock in order to diversify, since keeping a large sum invested in one stock puts you at risk if the stock loses favor and has a big drop in price. However, once you sell the stock, you lose the opportunity to take it as a distribution when you leave the company.

You indicate a desire to retain the stock and to ultimately pass it on as part of your estate. This is a great strategy if you don't have to sell the stock during your retirement years. To achieve this possibility you must retain the stock.

If you sell some of the stock in order to diversify, you will lose the tax advantage applicable to company stock for the shares you sell. These were probably the tax consequences your financial planner was referring to. You should check with the third-party administrator regarding the impact that selling some shares will have on your cost base.

TB: Employers usually combine loan payments with other contributions that are sent to be invested. Apparently your employer sends new contributions to be invested at the end of each month. Some employers send contributions to be invested each pay period but many send contributions to be invested at the end of each month.

Legally it's possible to give your employer a $1,000 check to be credited to pay off the loan more quickly; however, most employers don't like to take personal checks. It's much easier, administratively, to handle loan repayments via payroll deduction. You need to ask your employer whether it will accept your personal check. If it won't, ask if you can increase the amount that's deducted from your pay to be used to repay the loan. For example, if you increase your loan deduction by $200 for five pay periods, you can achieve a similar result.

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: Unfortunately, there aren't any legal time limits for distributing your 401(k) money when you leave the employer prior to retirement age. Legally, a plan may be established requiring you to wait until retirement age to get your money. The best advice I can offer is to become familiar with the benefit payment process before you leave the company. Complete the applicable paperwork that's required to trigger the distribution process as soon as possible after you leave the employer. Submit what's required and keep after the applicable contact until you receive your money.

TB: A key factor is the level of employer matching contributions. You should do everything possible to continue contributing to your 401(k) at the level that is matched by your employer.

I recommend borrowing the down payment if you can afford to repay the loan, pay the home mortgage and continue contributing to your 401(k) plan. If this won't be possible, I would consider taking a hardship withdrawal from the plan when you buy the home. The best way to do this is to buy the home and take the withdrawal at the beginning of the year. The tax break that you receive from owning the home will offset all or most of the tax that is generated by taking the hardship withdrawal. It's important to buy the home at the beginning of the year to get the largest tax break. You will be required to suspend your contributions for one year when you take the hardship withdrawal unless your employer's plan permits you to show that the withdrawal is required because you don't have any other funds available. If you're required to suspend your contributions at this point, the tax breaks provided by home ownership will help you offset the increased tax resulting from your lack of 401(k) contributions.

TB: The answer to your first question depends upon what portion of the loan was reported as taxable income during 1998. If the entire unpaid loan balance was reported as taxable income during 1998, he won't have any additional tax to pay during 1999. If he reported only the amount that should have been repaid during 1998 on his 1998 return, then he will have to report as taxable income during 1999 the amount that should have been repaid in 1999. To answer your second question, the amount that isn't repaid in a timely manner is considered a taxable distribution and must be reported as taxable income.

TB: There are a number of reasons why 401(k) investments are restricted to certain types of investments. First, some specific types of investments such as collectibles are legally prohibited. Employers also limit the types of investments they permit for liability and administrative reasons. Employers retain some fiduciary responsibility even when investment control is delegated to the participants. For example, there's a risk of being sued if they permit investments that are considered to be inappropriate for this type of plan. A venture or incubator fund could be considered by many to be an inappropriate investment vehicle for a 401(k) plan.

Administratively, it also isn't desirable to use investments that aren't readily marketable. Venture capital or incubator funds generally aren't open to small investors and most are illiquid. Establishing a market value can be very difficult. These are all reasons why most employers don't want to offer these types of funds.

TB: The representative who advised you to consider the eventual tax consequences of your decision gave you good advice. Financial planners generally recommend selling company stock in order to diversify, since keeping a large sum invested in one stock puts you at risk if the stock loses favor and has a big drop in price. However, once you sell the stock, you lose the opportunity to take it as a distribution when you leave the company.

You indicate a desire to retain the stock and to ultimately pass it on as part of your estate. This is a great strategy if you don't have to sell the stock during your retirement years. To achieve this possibility you must retain the stock.

If you sell some of the stock in order to diversify, you will lose the tax advantage applicable to company stock for the shares you sell. These were probably the tax consequences your financial planner was referring to. You should check with the third-party administrator regarding the impact that selling some shares will have on your cost base.

TB: Employers usually combine loan payments with other contributions that are sent to be invested. Apparently your employer sends new contributions to be invested at the end of each month. Some employers send contributions to be invested each pay period but many send contributions to be invested at the end of each month.

Legally it's possible to give your employer a $1,000 check to be credited to pay off the loan more quickly; however, most employers don't like to take personal checks. It's much easier, administratively, to handle loan repayments via payroll deduction. You need to ask your employer whether it will accept your personal check. If it won't, ask if you can increase the amount that's deducted from your pay to be used to repay the loan. For example, if you increase your loan deduction by $200 for five pay periods, you can achieve a similar result.

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.