Ted's Table

TB: Employers aren't required to include a provision in their plans to permit periodic distributions. Most plans provide only for lump-sum distributions. You will need to explore various alternatives to determine what will be best for you. Among the possibilities are doing less than a full rollover to an IRA and/or withdrawing some money from that IRA prior to 59½ even though you will incur the 10% penalty tax. You should also consider using other assets to live on until you reach age 59½, including home equity.

TB: You can roll over the money from the prior plan to your new 401(k) if your new employer will accept the transfer and if the prior plan was a U.S. tax-qualified retirement plan. You should check with your former employer to find out whether the plan you were contributing to was a U.S.-tax-qualified retirement plan.

TB: Your 401(k) balance will be subject to both Federal income tax and estate tax. The full balance is included as part of your estate. If you're married, you should do some estate planning to do whatever you can to reduce the tax bite.

TB: I don't do these computations so I would recommend getting help from a tax professional who knows the correct way of doing this.

TB: The actual law that created the 401(k) "safe harbor" plan is the Small Business Job Protection Act of 1996. IRS Notice 98-52 provides extensive guidance on the safe harbors. You can also find additional information in trade publications such as "The 401(k) Handbook," which is published by Thompson Publishing Group.

TB: The method recommended by your third-party administrator makes sense for a small plan with only three employees. You're correct that as account balances grow, the other employees are likely to prefer having the opportunity to control the investment of their own funds. If your third-party administrator uses a balance-forward recordkeeping system, it will be more difficult and expensive when you change to a participant-directed plan. I recommend sticking with mutual funds where the third-party administrator allocates the actual fund shares by participant.

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: Employers aren't required to include a provision in their plans to permit periodic distributions. Most plans provide only for lump-sum distributions. You will need to explore various alternatives to determine what will be best for you. Among the possibilities are doing less than a full rollover to an IRA and/or withdrawing some money from that IRA prior to 59½ even though you will incur the 10% penalty tax. You should also consider using other assets to live on until you reach age 59½, including home equity.

TB: You can roll over the money from the prior plan to your new 401(k) if your new employer will accept the transfer and if the prior plan was a U.S. tax-qualified retirement plan. You should check with your former employer to find out whether the plan you were contributing to was a U.S.-tax-qualified retirement plan.

TB: Your 401(k) balance will be subject to both Federal income tax and estate tax. The full balance is included as part of your estate. If you're married, you should do some estate planning to do whatever you can to reduce the tax bite.

TB: I don't do these computations so I would recommend getting help from a tax professional who knows the correct way of doing this.

TB: The actual law that created the 401(k) "safe harbor" plan is the Small Business Job Protection Act of 1996. IRS Notice 98-52 provides extensive guidance on the safe harbors. You can also find additional information in trade publications such as "The 401(k) Handbook," which is published by Thompson Publishing Group.

TB: The method recommended by your third-party administrator makes sense for a small plan with only three employees. You're correct that as account balances grow, the other employees are likely to prefer having the opportunity to control the investment of their own funds. If your third-party administrator uses a balance-forward recordkeeping system, it will be more difficult and expensive when you change to a participant-directed plan. I recommend sticking with mutual funds where the third-party administrator allocates the actual fund shares by participant.

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.