According to Lena Abissi, CPA, Congress two years ago made life simpler from two standpoints — management and distribution — for people with funds in a 401(k) retirement plan.
Abissi, a 13-year member of the Culver Wood and Culver firm, drew a contrast with the old law.
“If you were an employee and contributing to an employer’s 401(k) plan and you were to leave that employer, you had a choice of maybe leaving your 401(k) with the employer — if the administrator would permit it — or you might be able to roll it over to a new 401(k) down the road with the next employer.
“But it didn’t always work out,” she added, “because sometimes the administrator would say, ‘You’ve left our employ and we no longer want to be responsible for your 401(k), so you need to either take a cash distribution — which could cause a large tax liability — or to roll it over to an IRA.’”
And rolling to an IRA often could be an unhappy choice.
“You could do a direct transfer to an IRA,” Abissi said, “but a lot of people were reluctant to do that because they didn’t like to have direct control.” The problem, she indicated, is that many people have less confidence in their own investment acumen than in that of a plan administrator.
Aside from that, she said, some people who found themselves victims of downsizing had no choice but to take a lump sum distribution. They needed the money at a time when it was difficult to find other work.
“So they’d have to pay the penalty and all the rest of it,” she said.
But even if downsizing or lay-offs weren’t the issue, the New Jersey native added, moving from one employer to the other could be cumbersome under the old laws.
She explained that someone who went through several employers over a period of years might end up with a miscellany of 401(k) accounts, some perhaps still with previous employers, and some that had been rolled into separate IRAs.
“Options were fairly limited,” she said. “You couldn’t mix apples and oranges. You might have four or five different accounts and be trying to manage some and paying fees to have others managed for you.
“And, for instance, you couldn’t go take the 401(k) account with one company and pour it into a 403(b) plan if you went to work with a nonprofit.”
The tax law passed in 2001, however, has changed all that.
“It was quite a bit of an overhaul,” Abissi said, “so that if you are, say, with a nonprofit and have a 403(b) plan and go to work with a for-profit employer with a 401(k), you can put that 403(b) into the 401(k) once you’ve gotten your eligibility declared.
“You couldn’t do that before, and it was really a bother for a lot of people. These changes made a lot of sense, because they enable you to clean up your retirement plan.”
But, she stressed, it’s extremely important when changing employers and making alterations in one’s plan to keep on top of the deadlines to make these changes.
Unfortunately, Abissi said, many people who change jobs also can be in the midst of other changes — say, moving to another town — and they tend to worry about their retirement plans last.
“If you’re going to leave a company,” she said, “see your investment advisor beforehand. If you don’t have one, consult a professional in the field, not a buddy down at the tavern. The trouble is that the IRS sets the deadlines. That means that much time and no more. There’s no grace period.
“It’s sometimes hard to remember these things when you’re in the turmoil of a transition. Your plan administrator should furnish you with a paper — notice about the deadlines — but people sometimes lose track of it and don’t get around to settling things until it may be too late.”
Abissi said the changes in distribution rules for defined contribution plans also make life somewhat easier on retirees.
“It used to be that at age 70½ you were supposed to start withdrawing or they’d take a 50 percent tax of what they said you were supposed to take out based on your life expectancy.
“Well, they streamlined it when the law took effect in 2002. So now, basically, you can extend your longevity by assuming a beneficiary — a spouse or whomever — who is 10 years younger.”
She explained that some retirees are concerned about distribution because if the amount is large enough, it also can magnify one’s tax burden by making one’s Social Security taxable, too.
“There are some people out there,” Abissi said, “who would just as soon the money go to charity.”
But when it comes to questions of distribution and beneficiaries, Abissi says she must back off.
“It gets very complex depending upon a number of things,” she explained, “and we can’t discuss them because then we’d be practicing estate law without a license.
“This is an area in which you definitely want to consult a legal professional.”