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Job changes and your 401(k)
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November 27, 2000: 12:15 p.m. ET
If your company gets acquired, you may have to pay back a 401(k) loan
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NEW YORK (CNNfn) - You've changed jobs three times this year, and you're sweating about what to do with your 401(k). Can you open an IRA and take the tax deduction?
Or, you may be confused about a 401(k) loan. If your company gets acquired, do you have to cough up the money all at once?
Gary Schatsky, a fee-only financial adviser with ObjectiveAdvice.com, recently appeared on CNNfn's Your Money. He also answered questions via e-mail for CNNfn.com.
Every week, CNNfn.com brings you video from Your Money, where experts answer your questions about financial planning issues. If you have a question, you can e-mail the show at yourmoney@cnnfn.com.
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 Gary Schatsky, a fee-only financial adviser from ObjectiveAdvice.com answers questions. |
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Michelle writes: I have changed jobs three times this year. My first and second companies this year both had 401(k)s. My current company does not, but intends to start a plan as of Jan 1, 2001. Between the two 401(k) plans, I have contributed aproximately $6,500, far short of the $10,500 contribution cap for the year 2000. My question is: How much can I contribute to a new individual IRA and receive a tax deduction for this year? My income this year will probably be between $90,000 and $100,000. Going into next year, my income will be between $110,000 and $120,000, so I think I am not eligible for a Roth IRA. Unfortunately, I've got bad news and good news that's not really good.
First the bad news. Because you were an "active participant" in a retirement plan, even if you did not contribute the full $10,500, you cannot make a deductible IRA contribution, given your income for year 2000. Contributions are not deductible for people who were active participants in a qualified plan if their income is over $42,000, if filing single, or $62,000, if filing jointly.
A partial deductible contribution may be made if your income falls within a $10,000 range below those numbers. If it's more than $10,000 lower, you can deduct the entire contribution.
Now the "good" news. You are right, you are disqualified from a Roth IRA contribution if you are single and earning in excess of $95,000. You still can contribute to a non-deductible IRA if you desire, although you may wish to conserve your money for a future tax deductible contribution, expense or reduction of debt, if you have any.
Do you have a question about whether you can afford to stop working? E-mail our experts at retirement@cnnfn.com.
Deborah writes: My company spun us off to a new corporation, and my old company holds a 20 percent interest in the new corporation, while the new company holds an 80 percent interest. The new company wants my 401(k) loan paid in full by March 31, 2001. Isn't it the law that if I have at least $5,000 in 401(k) that I can keep it there?
Also, can I be forced to pay off a loan, and be told it has to be paid off in three months, when I have a former legal agreement with the former company that the loan is due within five years of the originating date? We were told that if we leave our employer, the loan becomes immediately due. Does the fact that the company was spun off (only 80 percent worth) make the new company a new employer that can legally require me to pay off this loan in three months?
Ahh, the esoteric world of 401(k) rules and regulations. One of the downsides to a 401(k) loan is that when you leave a company (quit or are terminated) you must pay off any outstanding loans, or they will be deemed to have been a distribution to you, subject to tax and perhaps penalty.
It sounds like you now have a new employer and are terminating employment with the old employer. While it is true that if you had $5,000 or more in a 401(k) you can keep the account where it is upon termination, this rule does not affect loans, which are subject to the different rules listed above.
Consider attempting to payoff the loan through some other short-term borrowing opportunity rather than paying the tax and potential tax penalty.
If you think you can repay the loan over the next year at an expensive interest rate (a line of credit or a credit card overdraft), it may seem cheaper than the tax and tax penalty. Obviously, trying to pay it off from savings or even a prudent liquidation of non-taxable investments would make even more sense.
Happily, you've got more than four months to line up alternate financing and/or savings to pay off your balance. 
* Disclaimer
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