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Cash Flow

For a No-Leak 401(k)

By Albert B. Crenshaw
Sunday, January 2, 2005; Page F01

One of the key problems that continue to beset 401(k) and related retirement savings plans is what experts call "leakage."

By that they mean the tendency of account holders, especially younger ones, to withdraw their money when they change jobs and spend it. It hasn't helped that many companies are eager to get rid of accounts with small balances and are all too ready to cut checks for departing workers and close them out.

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Congress and policymakers in presidential administrations dating back to George H.W. Bush's have tinkered with law and regulation to try to preserve such small balances, knowing that even a few thousand dollars, left to grow for 40 years, can turn into real money.

Over the years, the government has added rules that require tax withholding on balances that are cashed out and not rolled over into other tax-deferred accounts, such as a 401(k) at a new employer, or an individual retirement account.

Congress has added to the law a provision that forbids companies from forcing workers to withdraw their balances of $5,000 or more.

And in the big 2001 tax bill, Congress enacted another provision that requires companies to transfer accounts of $1,000 to $5,000 to a new retirement account unless the workers direct them not to. However, the measure also included a provision that put off the requirement until appropriate regulations could be written. So, while the measure has been on the books for nearly four years, it hasn't gone into effect.

But over the past few months the rules have been written. The Labor Department issued them in September, and the Internal Revenue Service last week offered guidance on how employers should comply. The rules become effective March 28.

Until now, employers have been all too happy to shove small accounts off their books, and it has been largely left to a worker to have the money shifted to another tax-deferred account. Workers who did nothing got a check -- minus 20 percent withholding. If they popped the money into, say, IRAs within 60 days, and made up the missing withholding out of their own pockets, they could preserve their accounts and avoid tax and penalties, but many didn't do that.

After March 28, employers who get no instructions from departing workers will be required to put the money into IRAs or other tax-deferred accounts. They will be allowed to set up IRAs in workers' names, and use their last known addresses. Employers will not be deemed to have broken any rules if the account statements are bounced back by the Postal Service as undeliverable.

Employers may also amend their own k-plans and eliminate the mandatory distribution of small accounts and keep the money in their own plans -- an avenue many may find easiest to follow.

The message for workers, particularly younger ones, is clear: The government wants your 401(k), or the like, to work as it is supposed to in providing a decent retirement income for you. It can't and won't if you don't do your part.

So, in addition to joining the plan and taking care in choosing investment options, you should keep an eye on your money when you change jobs. For most people, the best move is to shift the account to the new employer's plan.

But if you can't -- not all employers allow transfers from other plans -- or if you don't like the new employer's investment offerings, you should plan ahead. Choose a suitable mutual fund or other investment vehicle for a tax-deferred account and then go to your benefits office and direct it to transfer your balance there. That way there's no withholding, no risk of penalty, and the benefits people or the mutual fund, or both, will help you open the account and get the money transferred.

You can take some comfort from the thought that if you don't do anything and you have at least $1,000, your employer will do something for you. And the employer has to notify you about what it is doing, and give you a chance to revoke the choice. But at the very least, if that's all you can be bothered to do, note where the money is going, and make sure your former employer and the institution that now holds the account both have your address.

That way you'll get your statements, see how the account is doing, and, if and when you grow up, you'll know where to go to move the money to an account that really suits you.

Aid for tsunami victims may be deductible, the Internal Revenue Service noted last week. Contributions to American charitable organizations that provide assistance in foreign countries qualify as deductible, provided the U.S. organization has full control and discretion over the uses of the money, the IRS said.

IRS Publication 3833, "Disaster Relief: Providing Assistance Through Charitable Organizations," explains how the public can use charitable organizations to help victims of disasters, and how new organizations can obtain tax-exempt status, the agency said. It's available at the IRS Web site: www.irs.gov.

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