What Happens If I Take Money Out Of My 401(k)?

There are some general guidelines to follow when you withdraw money from your 401(k) plan. You can either take a taxable distribution or rollover your money into an eligible retirement plan, defined as another qualified plan, an IRA (other than a SIMPLE IRA), a section 403(b) plan or a governmental 457(b) plan. 

If you take a cash distribution, 20% federal taxes are required to be withheld. The distribution will be taxed as ordinary income and the amount of tax you owe will depend upon your tax bracket. Also, if you are under the age of 59 ½, you will generally be subject to a 10% early withdrawal penalty.

If you roll over your money into an eligible retirement plan, you will not be subject to any taxes. The taxation will be deferred until you take a taxable distribution from the plan into which you rolled your money. A direct rollover means that the money is directly deposited into the eligible plan and no taxes are withheld. An indirect rollover means that the money is distributed to you and 20% taxes are withheld. You will then have 60 days from the date of distribution to roll the money into an eligible plan. Otherwise, it will be considered a taxable distribution. Most rollovers are accomplished through the direct rollover process.

A hardship distribution must be taken as a taxable distribution. You cannot roll over a hardship distribution. However, you are not required to have 20% taxes withheld. You can either waive the withholding requirement or choose any amount to be withheld. However, you will still be subject to the 10% early withdrawal penalty.

There is another possibility of converting your distribution to a Roth IRA. The pre-tax money that is distributed and converted to a Roth IRA will be taxed at the time of the distribution/conversion. However, there is no tax withholding and the 10% early withdrawal penalty does not apply, unless the converted amount is subsequently distributed within five years after the conversion.

In conclusion, there are several possibilities of how your money can be distributed from a 401(k) plan. The tax implications can be confusing and sometimes complex. It is always best to consult a professional tax advisor before making any decision, as an uninformed one could significantly increase your tax liability.

-Glenn Bowman, QKA, QPA, CPC

What our Plan Analysts do Behind The Scenes

“If you can measure that of which you speak and can express it by a number, you know something of your subject; but if you can not measure it, your knowledge is meager and unsatisfactory.” – Lord Kelvin

I like this adage because it identifies the importance of my role as a Plan Analyst at the MandMarblestone Group llc.  The MandMarblestone Group delivers each of its clients a tailored product because we realize that one size does not fit all.  So in order for us to see what advantages we can provide to our clients, we need to take their “measurements” so we can “know something of our subjects.”  The Plan Analyst’s job plays an important part in this “measurement” process.

Boiled down to its essence, a Plan Analyst’s duties at MMG are to collect and synthesize our client’s retirement plan information so that it can be analyzed. Now I would like to say that I am going to spare you the details, and I will try to keep it light, but it is important to point out that it is the details (and not our salaries/lunch breaks, as some may suggest) that are what matter most to a Plan Analyst. The details allow us to measure our success.

Our mission of measurements starts with the collection of the client’s investment statements.  Now this may seem like a simple task.  But to a novice it can be a path wrought with frustration and muffled swearing.  One of the most important tools we have in navigating this path is to know how and when to ask the right questions.  If we ask the right questions it can save us and others time and frustration.  For instance, “Where are the client’s assets?” and “What specific forms does this financial institution require in order to release the information I am requesting?”  And for those of you who may have been on the receiving end of this process, I ask that you please bear with us, as you may not be the first person we contacted that day to make this request, or even the hundredth.  Any Plan Analyst here at MMG can tell you that not one plan is exactly the same, which means our approach in getting this information is different for each plan.  For a variety of reasons some prove to be more difficult than others.  Consider that a financial institution will often require us to file a “Letter of Authorization” to allow us access to the client’s statements.  A plan with 80 participants, each with an account at a separate financial institution, could mean 80 letters of authorization that have to be drawn up, proofed, sent to the client for the trustees to sign, then forwarded to each financial institution to be placed on record.  Now, if everything goes well, you will get your statements, great! Does it always go smoothly, no.  And is it always this difficult, no, but there are a few financial institutions, however, who make this process particularly, uh…, let us say lengthy, “ahem” (You know who you are). 

Once this monumental task of data collection has been completed, it must now be digested.  The digestion process begins by reviewing the investment statements and reports and culling the information needed. It is then arranged in a spreadsheet that will help us piece together a picture of the client’s assets within their retirement plan. This can be a very tedious task that requires considerable amounts of focus, as there can be large amounts of information to digest and it is important that nothing is overlooked. While the picture of the client’s retirement plan is being pieced together, the Plan Analyst will begin to scrutinize the bits of information for discrepancies. We will compare the investment statement with census and contribution records from the client to see if and where a discrepancy exists. An essential part of keeping records is communicating the information correctly, and not everyone gets it right all the time.  So, once a variance has been identified, it needs to be addressed.  Before addressing an issue we need to take into consideration who the client is and where their assets are held. There are a myriad of problems that can arise and an equal number of solutions to these problems.  Of course, we will want to choose the path that will get our client the best results with the least amount of effort on their part. This path will be different for every client and knowing how to navigate that path is of the utmost importance.

Now that we have navigated that minefield, and we have a clear picture that reflects the information provided by the investment statements we will await receipt of the contribution confirmation. The contribution confirmation is the final piece of the Plan Analyst’s puzzle. Our brilliant Case Managers will diligently work over the data the client has provided us to deliver to the client the perfect contribution fit. They will submit this masterpiece to the client for its approval. Once approved, the Plan Analysts will record the confirmed contribution information into their spreadsheets. Once the accounting is finalized, it is reviewed by another peer.  The finished spreadsheets will then be given to the Case Managers for one last review before they proceed with their work on the final valuation.

And there you have it, a peek behind the curtain. I hope that this journey has impressed upon you that the magic that MMG performs with retirement plans is not entirely magic but also hard work. Our commitment to delivering a superior product is driven by our attention to the details and our ability to manage what we measure.

 John Paul Gallagher

 

 

What is the Best Qualified Retirement Plan for your Company?

Good question – this would depend on many factors such as these:

1.)   The demographics of your staff

2.)   Your age and annual compensation

3.)   How much money you want/can afford to put away now

4.)  How much flexibility you want with annual contributions

For purpose of this discussion, we will exclude Simplified Employee Pensions (SEP) and SIMPLE IRAs.  While these plans are easy to establish and often well-suited for very small employers with little or no staff, they require significant staff contributions relative to the business owner’s contributions.  Generally, these plans are ineffective in staffed organizations where the business owner’s objective is to minimize the staff contributions and maximize the owner’s contributions.

Traditional qualified retirement plans are either Defined Contribution (DC) or Defined Benefit (DB) plans.  Just as their names imply, a defined contribution plan’s benefits are oriented towards annual and ongoing contributions, while defined benefit plans are oriented towards a fixed benefit at a certain age. The essential difference is that defined contribution plans place the investment risk on the participants, while the employer assumes the investment risk in a defined benefit plans.

The most common form of defined contribution plans are profit sharing plans and 401(k) plans, which are actually profit sharing plans with a 401(k) funding component.  Despite their names, these plans’ operations have little or nothing to do with the profits of the company, and should be viewed as primarily a legal description.

1.)   Profit Sharing Plans.  These are among the simplest and most flexible of qualified plans.  At the owner’s discretion, annual employer contributions are made to the plan and allocated in accordance with the formula set forth in the plan document (typically geared to compensation).

Advantages are as follows:

a. They are among the easiest to administer, due to their simplicity.

b. They are suited to simple and inexpensive trust arrangements, such as a pooled trust account.

c. They offer the business owner maximum flexibility on an annual basis, as contributions are purely discretionary.

d. Given the right demographics and plan design, they can be very effective in leveraging large contributions to owners while minimizing the staff costs.

e. They allow a business owner to receive annual contributions up to the defined contribution maximum annual addition ($51,000 for 2013).

They can be less effective, however, than more sophisticated plans because of the following:

f. In their simplest forms, they do not offer participant self-direction of investments, which minimizes their perception in the organization as a broad-based benefits program.

g. Given the wrong demographics and plan design, they can be ineffective in leveraging large contributions to owners while minimizing the staff cost.

h. They do not permit participants to contribute money on their own.

2.)   401(k) Profit Sharing Plans.  These plans incorporate the discretionary employer contributions of a profit sharing plan, and introduce additional funding components such as participant deferred compensation (401(k) deferrals) and employer matching contributions.

Advantages are as follows:

a. In organizations with less favorable demographics, they are more effective in leveraging the basket of contribution types toward the owners while minimizing the staff cost than in  profit sharing plans.

b. They permit participants to defer contributions out of their periodic pay, giving much more control over individual contributions.

c. They are viewed as a more broad-based benefits program by staff.

d. They typically offer self-directed investments, which is generally favored by participants.

e. They permit owners age 50 and over the ability to contribute “catch-up” 401(k) deferrals, increasing their maximum annual additions (up to $56,500 in 2013).

These plans are more complex than profit sharing plans, and the byproduct of this is as follows:

f. They require additional payroll and administrative functions.

g. They are subject to more regulatory testing.

h. Self-directed investment arrangements are more sophisticated and expensive than pooled investment agreements.

Defined Benefit plans have historically been thought of as “traditional” retirement plans, although their status as such has waned over the last several decades.  These days, in the small plan marketplace, they are frequently paired with defined contribution plans to enable companies to make annual contributions well in excess of the defined contribution limits.  They work best with demographics that include older business owners willing to commit to large, reoccurring annual contributions.  The contributions are actuarially determined by the plan’s benefit formula as well as the actual investment experience, to stay on track to provide a certain level of benefit at retirement age.  Cash Balance Plans are a form of defined benefit plan which mimics the look of a defined contribution plan, as it expresses the benefit in terms of an annual contribution rather than as an annuity payable at retirement.  Important considerations for defined benefit arrangements are as follows:

a. By their very nature, there is no investment self-direction with these plans.  Accordingly, their trust arrangements are simple and cost-effective.

b. They allow (require) much larger employer contributions than in defined contribution plans.

c. They subject the employer to investment risk, requiring even larger contributions when investment objectives fall short.

e. They are subject to government sanctions, should their required annual funding fall short.

f. They are required to be certified by an Enrolled Actuary, and must bear this additional administrative cost.

g. Benefits calculations and legal requirements are more complex than in defined contribution plans.

h. Many defined benefit plans are subject to the jurisdiction of an additional Federal agency, the Pension Benefit Guaranty Corporation (PBGC).

i. They may be prohibitively expensive to fund for most many medium and large employers

This is a lot to consider in an area that is not common to the knowledge of most business owners.  There are elements of plan design in all types of qualified retirement plans that can be customized to an employer’s objectives and demographics, and should be carefully considered before installing a plan.

We suggest the first step is to discuss your objectives with your trusted advisors, such as your accountant and financial advisor.  Once your objectives are taking shape, we invite you to contact the attorneys and consultants at the MandMarblestone Group, llc for a complimentary design analysis.  But please, do not delay, your compound interest is wasting away!

Things to Consider when Prefunding Employer Matching or Safe Harbor Matching Contributions

Many employers opt to fund their employer matching and safe harbor matching contributions with each paycheck.  But did you know that unless your plan document expressly provides so, the contribution is not required to be funded each pay period? Rather, you have until the following year to fund the contribution.  The deadlines for calendar year entities are as followed:

Entity Type	Filing Deadline	Extended Deadline
Corporation (including LLCs taxed as a corporation)	March 15th	September 15th
Partnership (including LLCs taxed as a partnership)	April 15th	September 15th
Sole Proprietorship	April 15th	October 15th

 

For those who choose (or who are required by the document) to fund as you go, there are a few items to keep in mind while administering your payroll, particularly Internal Revenue Code 401(a)(17) limits, contribution sourcing and lump sum deferral deposits.

IRC 401(a)(17) limits the amount of compensation that may be taken into account for any plan year when calculating a participant’s benefit accrual for that plan year.  The dollar limitation for plan years beginning in 2013 is $255,000.  Assuming a 401(k) plan provides a 3% matching contribution and a participant’s 2013 compensation is $260,000, the maximum matching contribution would equal $7,650.  The compensation MUST be capped at the IRC 401(a)(17) compensation limit which would be $255,000.

Another problem may occur when an employer remits its contribution online.  Safe Harbor Matching contributions are ALWAYS 100% vested, whereas a discretionary Employer Matching contribution is typically subject to a vesting schedule.  If an employer incorrectly remits the discretionary Employer Match to the Safe Harbor source and then processes a benefit payment request for a terminated participant, an overpayment will result if the participant is not yet fully vested in the discretionary matching source.  Once the overpayment occurs, it is difficult to recover the non-vested portion from the retirement plan participant who is no longer employed.  This concern is mitigated if all matching contributions are deposited and distributed after year end.

Lastly, some plan participants will deposit their entire deferral for the year with one lump sum.  If the plan does not offer the flexibility to true-up the employer match then the participant would not capture the full benefit of the employer matching contribution.  For example, let us assume that John Jacob is a participant in a retirement plan that provides a 3% matching contribution with no true-up.  John decides to deposit $17,500 on January 30^th from his monthly compensation, which totaled $25,000.  His total match for the year would be $750 (3% of $25,000).  If John’s annual compensation was $255,000 then he would lose out on an additional $6,900 in match because the plan does not provide for a true-up.

So, what is the best way to avoid these issues? Hire the MandMarblestone Group llc!  Our firm provides a flexible document, legal counsel, intelligent staff and expert advice.  We are only a phone call away and would be delighted to speak with you!

Kimberly Veitch, Retirement Plan Consultant

Flash! Obama Budget Revised to Eliminate Small Business Retirement Plans! (Just kidding… or are we?)

President Obama’s budget proposal was republished today to make it clear that all small business retirement plans would be required to terminate. An official from the White House, requesting anonymity, stated: “What is everybody getting so excited about?  This doesn’t change a thing from our our original budget proposal.  We always meant to shut down these plans, but the language we used wasn’t clear about our intentions.  Since we want to be completely transparent with the American people, we decided to redo the proposal and just say it outright.” 

When questioned further, the official went on to discuss the provisions as they originally appeared:  “Well, first, we put a cap on deductions for employee contributions to these plans at 28% of adjusted gross income.  It should have been obvious to everybody that we wanted small businesses to terminate their plans, because why on earth would business owners want to sponsor a plan for their employees if they had to pay income tax twice on amounts they contributed, once when they put the money in and again when they took it out?”  When asked whether this was at all fair, because deductions for retirement plan contributions are not permanent revenue losses to the government, but merely deferral of receipt of these revenues, the official responded: “Fair, shmair. Are you kidding?  Nobody on Capitol Hill looks at the long term.  We’re interested in raising revenue now. If we can collect taxes on the same dollars a second time later on, that’s gravy!”

He then expressed frustration that this provision alone was not causing small businesses to terminate their plans. “Don’t these people take a hint? Do we have to hit them over the head with hammers? Well, apparently we do, so we then proposed a $3 million cap on the amount of money that a participant can accumulate in a retirement plan before tax-deferred contributions must stop.  We figured that this was sufficient to cause all small business owners who had successfully invested their retirement funds to shut down their plans.  Why in the world would they continue to spend money on contributions for staff and administrative expenses and the like if they could not personally receive additional contributions?

“Still, we weren’t getting through to people that these plans have to go, so we amended our proposal to state the obvious. Believe me, it’s not a change in our philosophy, but now we said it in plain English.”

But why, the official was asked, are you so intent on eliminating these plans?  “Don’t you understand?” the official said, expressing some frustration at the question, “We have to close the deficit, and we’re going to do it regardless of whether the policy makes any sense.  In fact, if it doesn’t make any sense to anybody, that demonstrates a true bipartisan approach.”  But, a reporter persisted, “If small business owners are able to save for retirement on their own without a plan, what’s going to happen to their employees, who will no longer have the benefit of a workplace retirement plan to enable them to save on a regular basis (more than 70% do with a workplace 401(k) plan, while less than 5% contribute to IRAs on their own), and will no longer be getting contributions from their employers?” 

Stamping his foot, the official yelled, “What do you think Social Security is for?”