401kXtra Learning Center

What’s the new retirement savings credit? Can I get money back for contributing to a retirement plan?

The retirement savings credit is available from 2002 through 2006 to low-to-moderate-income taxpayers. If you qualify, you may receive a credit of 10%, 20%, or 50% of your contribution to a traditional or Roth IRA, 401(k), 403(b), governmental 457, SIMPLE, or SEP plan, depending on your income level.
You cannot take this credit if you are claimed as a dependent on someone else’s return, if you are under age 18, or if you are a full-time student.

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Does the new tax law change how much I can contribute to my IRA?

Starting in 2002, the amount an individual can contribute to an IRA account will increase from $2,000 to $3,000. In addition, those over 50 years of age can kick in an additional $500. That means that for a married couple over 50, the allowable total contribution rises from $4,000 in 2001 to $7,000 in 2002.

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What tax form will I receive if I receive pension plan, annuity or insurance distributions?

If you receive a distribution from a pension plan, annuity or insurance contract, the company that makes the payment will send you a Form 1099-R. This form also is sent when your receive payments from a profit-sharing plan, Individual Retirement Account (IRA), or other tax-favored retirement program.

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At what point do I own my employer’s contributions to my 401(k) account?

Any money of your own that you put into your 401(k) is automatically yours to keep. You could take the money with you, even if you quit your job at the end of your first week. But that’s not necessarily the case with the money that your employer may contribute on your behalf. In some plans, you’re vested in [own] your employer’s contributions immediately. Other plans might not vest you 100% until you’ve been in the plan for five years, or they start vesting you gradually 20% per year from year three. But in all cases, by law you must be fully vested in your employer’s contributions after seven years of service for graded vesting and five years of service if they use a 100% at five years cliff vesting schedule. Also, all plans must consider you fully vested after you attain normal retirement age under the plan document, ususally age 65. Most will fully vest you if you die or become disabled, and if the plan is terminated, you will always be 100% vested.

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How are my years of service determined in regard to vesting in a 401(k) plan?

Many employers who make matching contributions to their workers’ 401(k) plans require employees to work a specified number of years before they’re entitled to collect the money that the employer has kicked in. This process is called vesting. In some plans, your employer’s contributions are vested immediately. In others, you don’t even start vesting until at least five years have passed-meaning that you can’t keep any of the company’s contributions if you leave its employ anytime sooner, but after five years of service you will be 100% vested. Companies that don’t offer immediate vesting base their vesting on the worker’s years of service to the company. By law, you must be fully vested-in other words, be entitled to all the funds your company has contributed to your 401(k) plan-after seven years of service using a graded vesting schedule and five years of service using a cliff vesting schedule. Your employer can use one of two methods to determine your years of service. According to "Building Your Nest Egg with Your 401(k)" (American Press Inc., Washington Depot, Conn.), "In the first, your years of service are determined by the number of hours you actually worked in a 12-month period. You must be credited with a year’s service for any 12-month period in which you worked at least 1,000 hours. This lets you earn a year of service in less than 12 months. The second way to calculate years of service is the elapsed-time method. Your employer counts 12 months per year from the date you were hired to the date you leave, regardless of how many hours you worked. Many companies use both methods: the first is often used to determine your eligibility to participate in the plan, and the second is used to decide when you’re fully vested in the company’s contributions to the plan."

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The company I work for has four different business units. The subsidiary that I work for does not offer a 401(k) plan, but I am transferring to another unit that does. How will my years of service be determined for vesting purposes?

If you transfer from a unit that does not offer a 401(k) to another unit that does, your employer is legally required to count all your years of service with the company to determine your eligibility for benefits and for vesting. Your length of service at any particular unit is irrelevant. What counts is the time that you have worked for the company overall.

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