Forced Out of 401(k)? Not So Fast

Last Updated Sep 21, 2011 3:24 PM EDT

I often get questions from readers and sometimes I'll answer them here. If you have questions you'd like to ask, please email me by clicking on the "Contact Ray Martin" link to the left.

Question:
"I just retired at the age of 74. I'm told I have to take my 401K (Thrift Saving Plan) out before April 1, 2012. What or where can in invest or put my saving and it will be safe."

Ray Answers:
First things first: you may not have to take a full withdrawal of your account from your employer's plan.

Employers can automatically close the accounts of former employees only if the balance is low. This provision in the plan is called a "force-out" provision. Almost 90% of plans have a force-out provision. As of March 2005, the account balance limit for force-out provisions is $1,000. A participant whose balance is over $1,000 cannot be forced from the plan and can leave their balance in it.

That said, since you are now retired and are over the age of 70.5, you will be required to take a minimum required distribution from your 401(k) plan account. This is not a plan provision, but instead it is an IRS requirement.

An account owner must begin taking distributions from their accounts by April 1 of the calendar year after turning age 70½ or April 1 of the calendar year after retiring, whichever is later. The amount of distributions is based on life expectancy according to the relevant factors from the IRS Table III, Uniform Lifetime in IRS Publication 590.

The only exception to the minimum distribution requirements are for people still working once they reach age 70.5, and the exception only applies to the current plan they are participating in.

Only a Roth IRA is not subject to minimum distribution rules.

The penalty for failure to make the minimum distribution is stiff: 50% of the amount that should have been distributed, which is one of the most severe penalties the IRS applies.

Check back in a day or so when I'll write about why leaving you account balance in your employer's plan may be better than rolling it over to an IRA.
  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.

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