Ted's Table

TB: Not for the moment. The tax-reduction bill that was passed by Congress, but vetoed by the President, earlier this year contained a provision eliminating the 25% maximum-contribution limit. Your problem would have been solved had this bill been enacted. This change will probably be included in a tax bill next year, hopefully one that is enacted. Until the 25% limit is removed, the amount you may contribute will be limited. Being able to shelter 25% of your income is a big break, so be thankful for what you have, including the employer contributions to the ESOP for now.

TB: Continuing to put money into the plan after tax has some worthwhile benefits. The first is the semi-automatic savings through payroll deduction. Most of us aren't able to save as effectively when we have to do it on our own. Next, the income and gains are tax-deferred. Third, the money is accessible if you need it.

Your company should change its plan to permit you to contribute up to 16% of your pay pre-tax, subject to the $10,500 maximum limit for the year 2000. You should be permitted to contribute more than 10% pre-tax if you haven't hit the maximum-dollar limit and if you aren't one of the highly compensated employees.

TB: You should be able to roll over everything but your after-tax contributions. The entire amount that would be taxable should be eligible to be rolled over.

As a separate issue, I strongly recommend carefully considering your plan. The $350,000 amount probably will not be sufficient for you to retire at age 47. Assuming a 3.5% inflation rate, a moderate investment portfolio, and that you live for another 30 years, this sum will provide approximately $20,000 per year of inflation-adjusted income. This isn't very much, particularly if you have to pay for your own medical insurance.

Most individuals who retire early fail to consider the impact of inflation. Remember, $30,000 of income today will have only $15,000 of buying power 20 years from now if the inflation rate is 3.5%. You will need $60,000 per year 20 years from now to buy what $30,000 will buy today. You will be only 67 at that time. You might live for another 20 years or so after that.

TB: Employer stock receives a special tax break only when the stock is distributed and not rolled over. The stock is taxed when it is received at the value of the stock when it was acquired by the plan. The spread between this base and the value when the stock is sold is taxable as a capital gain. You lost this potential tax advantage when you rolled the stock into an IRA. To reverse this transaction, you would need to return the stock to the plan and then have the stock distributed directly to you. I don't think this can be legally accomplished at this point. Even if it can be, your former employer and the organization where you rolled the stock into the IRA aren't likely to want to be involved in reversing this transaction.

By the way, what you have done may not be an error. If you need to use this money to provide income during your retirement years, what you have done may be the best alternative. Taking a distribution of the stock is most attractive when you have enough money from other sources to pay the resulting tax on the stock distribution and if you are able to retain the stock to pass it to your heirs. In this instance, the stock passes to the heirs without being subject to tax on the gain.

TB: The answer involves two separate issues. The first is when the distribution is reported to IRS. The 1099 usually is filed during January of the year after the distribution has occurred. This form lets the IRS know the distribution has occurred and the taxable amount.

The other issue involves the actual process of closing out your total account. Assume you're laid off during April and you receive the paperwork from the employer two weeks later explaining your options. Next, you request your employer to distribute the entire account to you. It will be necessary to deduct the mandatory tax that must be withheld when a distribution is made directly to you. This tax is paid to the IRS. Your actual liability is determined when you file your tax return. The amount that was withheld may or may not be adequate to cover your actual tax liability.

Bottom line: the timing of the actual distribution will be governed by your plan's administrative process including when you make your decision.

TB: It's my understanding that the employer must restore only the amount that was forfeited. The employer was permitted to use the forfeited amount to reduce future contributions when your friend withdrew her money. When she was re-employed, the employer probably had to re-contribute the amount that had been forfeited.

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: Not for the moment. The tax-reduction bill that was passed by Congress, but vetoed by the President, earlier this year contained a provision eliminating the 25% maximum-contribution limit. Your problem would have been solved had this bill been enacted. This change will probably be included in a tax bill next year, hopefully one that is enacted. Until the 25% limit is removed, the amount you may contribute will be limited. Being able to shelter 25% of your income is a big break, so be thankful for what you have, including the employer contributions to the ESOP for now.

TB: Continuing to put money into the plan after tax has some worthwhile benefits. The first is the semi-automatic savings through payroll deduction. Most of us aren't able to save as effectively when we have to do it on our own. Next, the income and gains are tax-deferred. Third, the money is accessible if you need it.

Your company should change its plan to permit you to contribute up to 16% of your pay pre-tax, subject to the $10,500 maximum limit for the year 2000. You should be permitted to contribute more than 10% pre-tax if you haven't hit the maximum-dollar limit and if you aren't one of the highly compensated employees.

TB: You should be able to roll over everything but your after-tax contributions. The entire amount that would be taxable should be eligible to be rolled over.

As a separate issue, I strongly recommend carefully considering your plan. The $350,000 amount probably will not be sufficient for you to retire at age 47. Assuming a 3.5% inflation rate, a moderate investment portfolio, and that you live for another 30 years, this sum will provide approximately $20,000 per year of inflation-adjusted income. This isn't very much, particularly if you have to pay for your own medical insurance.

Most individuals who retire early fail to consider the impact of inflation. Remember, $30,000 of income today will have only $15,000 of buying power 20 years from now if the inflation rate is 3.5%. You will need $60,000 per year 20 years from now to buy what $30,000 will buy today. You will be only 67 at that time. You might live for another 20 years or so after that.

TB: Employer stock receives a special tax break only when the stock is distributed and not rolled over. The stock is taxed when it is received at the value of the stock when it was acquired by the plan. The spread between this base and the value when the stock is sold is taxable as a capital gain. You lost this potential tax advantage when you rolled the stock into an IRA. To reverse this transaction, you would need to return the stock to the plan and then have the stock distributed directly to you. I don't think this can be legally accomplished at this point. Even if it can be, your former employer and the organization where you rolled the stock into the IRA aren't likely to want to be involved in reversing this transaction.

By the way, what you have done may not be an error. If you need to use this money to provide income during your retirement years, what you have done may be the best alternative. Taking a distribution of the stock is most attractive when you have enough money from other sources to pay the resulting tax on the stock distribution and if you are able to retain the stock to pass it to your heirs. In this instance, the stock passes to the heirs without being subject to tax on the gain.

TB: The answer involves two separate issues. The first is when the distribution is reported to IRS. The 1099 usually is filed during January of the year after the distribution has occurred. This form lets the IRS know the distribution has occurred and the taxable amount.

The other issue involves the actual process of closing out your total account. Assume you're laid off during April and you receive the paperwork from the employer two weeks later explaining your options. Next, you request your employer to distribute the entire account to you. It will be necessary to deduct the mandatory tax that must be withheld when a distribution is made directly to you. This tax is paid to the IRS. Your actual liability is determined when you file your tax return. The amount that was withheld may or may not be adequate to cover your actual tax liability.

Bottom line: the timing of the actual distribution will be governed by your plan's administrative process including when you make your decision.

TB: It's my understanding that the employer must restore only the amount that was forfeited. The employer was permitted to use the forfeited amount to reduce future contributions when your friend withdrew her money. When she was re-employed, the employer probably had to re-contribute the amount that had been forfeited.

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.