Easing Withdrawal Pains From a 401(k) Plan
Q: I am so frustrated! I left my job in October, 1989, and still have not received my 401(k) account funds. I submitted my withdrawal request in April, 1990, and now, a year later, I still haven’t seen a penny. Is there anything I can do? Is this experience a common one? --L. C.
A: Your experience is not uncommon--nor is it necessarily the result of a tight-fisted employer refusing to pay out what’s owed you.
The distribution schedule of your 401(k) account should be detailed in your company’s 401(k) plan, a document you are entitled to receive from the plan administrator. Legally speaking, say our experts, a 401(k) plan could specify that distributions will be made only when participants turn age 65. A plan could also require distributions to be made three, five or even 10 years after an employee has left the company. As you can see, with such a range available, you are wise to see what your former employer chose.
Even if the plan of your former employer imposes no time lag for a distribution, delays of a year or more are not uncommon. Typically, withdrawals are processed at the end of the plan’s fiscal year, a date that varies with each plan. If your former employer’s plan year ends on March 31 and you submitted your withdrawal request in April, 1990, you would have to wait until at least April of this year for your money, and possibly longer, because of the time it takes to audit the account, make the required allocations and process any distributions.
However, if your former employer’s plan year has ended and you believe that your distribution should have long since been made, you can appeal the delay. The appeal process should be detailed in your plan or “summary plan description,” an accompanying document you are also entitled to get from your employer. If your appeal is denied, or you feel that justice has not been served, you can complain to the Department of Labor, which oversees these plans, or sue in federal court under provisions of the Employee Retirement Income Security Act of 1974.
When to Throw Out Your Financial Papers
Q: How long must I keep state and federal income tax returns and other financial papers? --B. T.
A: There is no absolute law or rule on this, but experts generally advise that you keep your tax returns indefinitely--just to be on the safe side. However, the supporting documentation and paperwork can be thrown away after three years, unless you are involved in litigation or other matters requiring those papers.
The rest of your financial records--canceled checks, bank statements, investment documents, etc.--can usually be thrown away after three years. However, records of your investments and home improvements should be kept for at least three years after you dispose of that investment or home because you will likely need these papers to determine your tax basis in these assets.
Record keeping is a hassle--but not keeping the necessary paperwork can be worse. Imagine trying to determine how much you have spent to improve your house so you can add it to your tax basis, only to discover that you have no records of what you spent! What about stock purchases or, even more tricky, dividend re-investments? If you don’t know what you paid for a stock because you threw the paperwork away, you’re going to have a tough time determining your profit. And the government isn’t likely to be very sympathetic.
How the IRS Views Personal Injury Suits
Q: I was injured in an automobile accident and accumulated bills totaling $12,000. I recovered $15,000 from the other driver, the limit of his insurance. He had no other assets we could attach. Of my recovery, my attorney got $5,000 and the rest went to pay off my medical bills. Am I required to consider the insurance recovery as income and pay state and federal taxes on it? Can I claim my medical expenses as a deduction? Also, is the state disability insurance I received taxable? --M. H.
A: Any recovery for personal injury is not taxable. Even if your recovery had been in excess of your medical and legal bills, you would not have been taxed on the money you were able to keep, say our tax experts. So, you do not have to report the $15,000 insurance claim you received. And there’s more good news: State disability insurance payments are not considered taxable income by either the federal or state government. (There have been moves to change this, but so far to no avail.)
However, the news isn’t so good on your medical expenses. They are not deductible to the extent that you were reimbursed. Based on the figures you provided, it looks as though you had $2,000 worth of medical bills for which you were not reimbursed. However, under recent tax law changes, medical expenses are deductible only to the extent that they exceed 7.5% of your adjusted gross income.
Worrying About a Bank as Trustee
Q: My wife and I are participating in a stock dividend re-investment program and have accumulated a significant number of shares. The trustee of the plan is a bank that has recently been listed as troubled and insecure. How safe is our stock? --S. G.
A: You should have nothing to worry about. Banks hold dividend re-investment plan stock in trust accounts that are entirely separate from the rest of their assets. Barring illegal activity, there is virtually no chance that the stock would be at risk if the bank should fail.
