Dear Editor, The Diaporan Star

The Editor,

The Diasporan Star

I salute you and your newspaper for dedicating a whole page of your newspaper to a very important topic-finance, a thing many of us take for granted. I hope this is something that will stay and I hope that other African based and/ or focused papers will devote a good amount of time and space to this very crucial topic.

I read the piece titled Financial Check-up with Chuck Dikko; Investing For a Financially Secure Retirement on page 21 of your May 2011 edition and have some comments and/ or questions as follows.

ELIGIBILITY

It is true that the typical eligibility for a 401 K plan is usually 1 year but there are other requirements. The regulation requires that you are age 21 and meet at least 1 year of service with a minimum of 1000 hours worked. The law also requires that a company must not let one wait more than 6 months after eligibility before participation. Hence companies must have at least two entry Dates. If a company requires you to wait for 2 years (not an option for 401K but with other qualified plans) before participation, you become fully vested immediately upon such participation.

CONTRIBUTIONS

It is true that the most an employee can contribute towards his qualified plan (401K) in a year is $16500 for 2011. But note that the most that can be contributed to your plan in a year by a company is the lesser of $49000 or 100% of compensation. Contributions to your 401K can come from three sources (employee deferral $16500 max, Forfeitures and Employer contribution). The $16500 employee contribution is the max one can contribute in a year but if you work for many employers, each employer can contribute up to the lesser $49000 or 100% of your compensation in 2011.

VESTING

It is true that an employee’s contribution is immediately vested (100 % vesting) but the employers contribution to a 401K can only vest on a 2-6 graduated cliff (0%, 20%, 40%, 60%, 80% and 100%) or 3 year vesting schedule not the 7 year reported by your paper.

A 7 year vesting schedule only applies to a Defined Benefit plan. For example a Defined Benefit plan can vest on a 3 to 7 year graduated cliff or a 5 year cliff.

An employer can offer a more favorable vesting schedule but cannot offer one that is longer than the time frame required by regulation.

LOANS / WITHDRAWALS

It is true that loans are allowed in a 401K plan but a proof of financial hardship as reported by your paper is not a requirement. The loan may not exceed the lesser of (a) $50000 or (b) ½ of the participant’s vested account balance. Exception to this loan amount is when vested account balance is less than $20000. In this situation, the maximum loan is limited to the lesser of (A) $10000 or (B) the vested account balance. It should be noted that the loan amount is reduced by the highest outstanding loan balance within the last 12 months period even if such loans have been paid off.

While withdrawals are taxed and are hit with a 10% penalty, the 10% penalty can be avoided if the employee meets one of the following requirements; age 59 and half, death, disability, substantially equal periodic payment-section 72t, medical expenses in excess of 7.5 % of AGI Adjusted Gross Income and Federal Levy Tax.

CASHING OUT

Upon termination of employment with a company you can cash out your 401K tax free if there is a direct transfer to an IRA or another qualified plan. An indirect transfer to you will be hit with a 20 % tax withholding. For example, assuming your account balance was $10000, the employer will issue you a check in the amount of $8000. You will have up to 60 days to deposit that amount plus the amount withheld into an IRA or a qualified plan to avoid the 20 % withholding. That is, you must deposit the full $10000. When next you file your taxes, Uncle Sam will then reimburse you the $2000 that was withheld by your former employer.

MANDATORY WITHDRAWALS

You are required by law to start withdrawing (RMD-Required Minimum Distributions) from your 401K by April 1 following the year you turn 70 and half. All other distributions must be done by December 31st of the year. You will be hit with a 50% penalty (of the amount you were supposed to withdraw) if you fail to do a required minimum distribution.

An exception to not withdraw is only available if you are still employed by the plan sponsor. This exception is not available to anyone who is a 5% or more owner of the said company.

DIASPORAN ANGLE

You reported that “for the Africans in the Diaspora, saving for retirement is three times as hard compared to the general population…” Is this number compiled from statistics or is this a “journalistic opinion?” I am just curious to know if there have been studies done to substantiate this conclusion.

Once again, I applaud your effort to educate the African on this crucial topic. I hope that your paper will be kind enough to share my comments with your readers and I welcome any feedback from you and your editorial team. I can be reached via email at reuel02@gmail.com or by phone at 973-223-4059.

Thanks

Reuel