As the most widely used and well-known retirement savings plans in the United States, 401(k) plans were the brainchild of benefits consultant Ted Benna. In 1980, Benna noticed that the rules established in the Revenue Act of 1978 made it possible for employers to establish simple, tax-advantaged savings accounts for their employees.

History

The term “401(k)” refers to Section 401(k) of the Internal Revenue Code. The provision allows employees to avoid taxation on parts of their income if they elect to receive it as deferred compensation rather than as direct pay.

However, the original provision did not allow for a separate account to be set up and funded through salary reductions. Benna petitioned the IRS to modify Section 401(k), which was written as part of the Revenue Act, and in 1981 the IRS complied. By the next year, several large companies began to offer new 401(k) plans to employees. Participants in 401(k) plans could then use their deferred income to make investments without being taxed on gains.

These new accounts quickly became popular. In 1983, more than 7 million employees participated in a 401(k) plan. By 1991, that number had reached 48 million, and the combined assets of all 401(k) plans surpassed $1 trillion in 1996.

In 2001, the United States Congress passed the Economic Growth and Tax Relief Reconciliation Act, which allowed for the so-called “catch-up contributions” for participants age 50 and older. The Act also allowed for companies to offer Roth 401(k) accounts, which require post-tax contributions but provide the benefit of tax-free growth and distribution.

Purpose and Uses

Modern 401(k) plans were not an intentional design of the U.S. government or the Internal Revenue Service. Indeed, the federal government twice tried to invalidate 401(k) plans in the late 1980s. The concern was that tax receipts would fall too fast as more workers funded their retirement plans.

Employees receive two significant benefits from 401(k) plans and other tax-exempt retirement accounts: first, there is the obvious tax benefit. Second, employees have a way to protect their retirement savings from losing real purchasing power through inflation. On the downside, 401(k) plans are more risky for employees than defined benefits plans, which are federally guaranteed.

There are obvious benefits to employers as well. For instance, the costs of offering retirement benefits have declined significantly. Small businesses particularly benefit from the new defined contribution plans; the plan allows these businesses to offer similar benefits packages to employees as those found in larger companies, leveling the playing field.

The federal government encourages the use of 401(k)s and other retirement plans. Even though tax receipts decline as more people participate, a population that funds its own retirement ends up reducing government expenditures on welfare programs for the elderly.

• Retain the assets in the SEP IRA
• Transfer the SEP IRA balance to a Traditional IRA or another SEP IRA
• Roll over the balance to a qualified plan, 403(b) or 457(b) account in which the individual participates

To read more, see the SEP IRAs tutorial.

This question was answered by Denise Appleby
(Contact Denise)

In general, the Social Security Administration, or SSA, does not encourage citizens to change their Social Security numbers, or SSNs. However, exceptions are made under certain circumstances. Victims of identity theft or abuse are the most likely candidates for new numbers.

Identity Theft

Identity theft is one of the fastest-growing crimes worldwide. In addition to trolling the Internet for unguarded information, thieves can obtain your SSN and other personal details by going through your trash, stealing your wallet, or contacting you by phone or email posing as an employer, bank employee or insurance agent.

Once your identity is stolen, it may not be possible to truly get it back. If someone manages to steal your SSN, he can easily use it to obtain other information about you, such as your name, birthday and credit information. Armed with this knowledge, a criminal can simply open up any number of new credit cards under your name, use them until the credit limits are met and then never repay the debts.

Often, a person does not know his identity has been stolen until he begins receiving calls from creditors or is turned down for a loan due to a bad credit score. In some cases, the damage is irreparable.

Harassment and Abuse

Sometimes it becomes necessary for a person escaping a violent relationship or other life-threatening situation to shed a previous identity to protect himself. Victims of domestic violence and stalking, or those who are under threat of physical harm, often must choose between the stress of starting over and the fear of staying put. The SSA does not normally issue new SSNs but does so to assist those whose safety is in danger.

Other Reasons

Of course, there are other reasons a person might want to change his SSN that are much less serious. The SSA may approve a change if similar numbers within a family unit cause confusion, for example, or if two identical numbers have been issued in error. If you have a religious objection to a certain number or sequence of numbers within your current SSN, you may also qualify.

Not So Fast

The SSA does not provide replacement numbers for those who are attempting to avoid the consequences of bankruptcy or are evading the law. In addition, you will not be issued a new number if you have lost your Social Security card but there is no evidence your number is being used by someone else.

Changing Your Social Security Number

To change your SSN for any reason, you must apply in person at any Social Security office. After providing a statement explaining why you need a new number, you must provide credible, third-party documentation of your reason, including medical, legal or police documents regarding any identity theft, abuse or harassment. In addition, you must provide documentation of your U.S. citizenship or legal residency, age, identity and current SSN. If you have custody of any children or changed your name in the past, supporting documentation must also be provided. Specific guidelines apply regarding acceptable sources and types of documentation.

The current Social Security system in the United States operates in a pay-as-you-go framework; the Social Security taxes paid by today’s workers enter the general fund and are immediately used to pay for current claimants. Privatization would eliminate the pay-as-you-go process. Instead, each taxpayer’s individual contributions would be invested into a separate account for his own retirement.

Proponents of privatization claim that the current system generates insufficient returns, acts like a Ponzi scheme and that a private system would result in higher standards of living for participants. Those who oppose privatization counter that it would lead to unwanted investment risk, and that it would be too difficult to move from the old system to a new one.

Today’s Social Security System

Social Security has come under increasing scrutiny because of its pending insolvency. Too many retirees are living for too long; current workers are not making enough payments to keep the program running.

When Social Security was implemented in the 1930s, the average life expectancy in the U.S. was 58 for men and 62 for women. Only 54% of men who reached age 21 would live to age 65, when it would be possible to collect Social Security benefits, according to the Social Security Administration (SSA). By 1930, there were only 6.7 million Americans 65 or older.

Today, there are more than 40 million Americans who are past retirement age. The average remaining life expectancy for those who reach age 65 is nearly 20 years. Moreover, the value of a Social Security benefit has been hard hit by inflation. Even with consumer price index (CPI) adjustments to their benefits, American seniors lost 34% of their buying power from 2000-2012.

How Privatizing Would Work

Privatizing Social Security would allow a worker’s salary contributions – which would likely still be mandatory at 12.4% – to be deposited into private investment companies or public-private management funds. Workers would have the option to increase their contributions to retire earlier or to increase their payouts in retirement.

At retirement, the worker would also likely be able to choose from several different payout options that are found in the private sector, such as annuity or life payments. In fact, this very system has been running in Chile since May 1, 1981.

The Chilean government had a pay-as-you-go system in place prior to 1981, but budget shortfalls led to a revolution in late-age retirement savings. By linking benefits to contributions on an individual basis, the Chilean workers have been able to realize an average annual rate of return that exceeds 9%; the U.S. Social Security system theoretically pays a 1% to 2% rate of return.

Even when accounting for risk-adjusted return, the privatized system in Chile offers hope that privatized retirement savings could help retirees and reduce the national debt at the same time.

If you decide to leave the company that holds your 401(k) plan, you have four options for dealing with your funds, and the tax implications depend on which option you choose. These options include:

1. Leave the money with your old plan (if eligible).
2. Move the money to a new employer’s plan (if eligible).
3. Move the money into a rollover IRA.
4. Cash out the 401(k), taking a distribution.

The rules are also different if you have borrowed from your 401(k) and leave your job prior to repaying the loan.

1. Leave the Money Alone

There are no real tax implications for leaving your 401(k) funds parked in your old employer’s plan. Your money remains and grows tax-exempt until you withdraw it. The plan is not required to let you stay if your account balance is relatively small (less than $5,000), but the company that holds the plan assets generally allows participants to roll the 401(k) plan assets into a traditional IRA within the company.

However, you won’t be able to make additional contributions to the plan. And because you are no longer an employee plan participant, you may not receive important information about material changes to the plan or its investment choices. Also, if you elect to leave your funds with your old plan and then later attempt to move them, it may be difficult to get your old employer/plan provider to release the funds in a timely manner.

2. Move the Money to a New Plan

You are not required to pay taxes on your 401(k) nest egg if you move it into a new plan. One caveat: While 401(k) funds are eligible under ERISA to be transferred from one plan to another, but 401(k) plans are not required to accept transfers. Your eligibility to pursue this option depends on your new company’s plan rules. Additionally, things can be tricky if the new plan is not a 401(k), as not all defined-contribution plans are allowed to accept 401(k) funds.

3. Establish a Rollover IRA

If you don’t have the option to transfer to another employer-sponsored plan, or you do not like the fund options in the new 401(k) plan, establishing a Rollover IRA for the funds is a good alternative. You can transfer any amount, and money continues to grow tax-deferred. It is important, however, to elect to perform a direct rollover. If you take control of your 401(k) funds in an indirect rollover, your old employer is required to withhold 20% of it for federal income tax purposes, and possibly state texes as well.

4. Cash Out and Take a Distribution 

You will pay income taxes at your current tax rate on distributions from your 401(k). Plus, if you are under the age of 59½, your distribution is considered “premature,” and you’ll lose 10% of it to an early withdrawal penalty.

The Bottom Line

If you have an existing 401(k) loan, regardless of the above options you elect when you quit your job, all outstanding 401(k) loan balances must be repaid (usually by the October of the following year, the deadline to file extended tax returns). Any money not repaid is treated as an early withdrawal by the IRS and you pay taxes on the amount in addition to being hit with the early withdrawal penalty.

When filing your tax return, you are generally required to include the social security numbers of yourself and the individuals for whom you claim as dependents. However, exceptions do apply.

Exceptions
Child Born and Died Same Year
If you have a child who died in the year of birth, and you did not apply for the child’s social security number, an exception applies to including that child’s social security number. However, you are required to attach a copy of the child’s birth certificate to your tax return and print the word “‘died” in column (2) of line 6c of your 1040 Form or 1040A Form.

Non-resident Alien
If you are claiming for a dependent who is a non-resident alien that does not qualify to receive a social security number, you must use the individual’s individual taxpayer identification number (ITIN) instead.

Obtaining Identification Numbers
Social security numbers can be obtained in the US by completing an application at your local Social Security office, or at the U.S. consulate for individuals who live outside the US.

An ITIN may be obtained by filing IRS Form W-7 with the IRS, or by working with IRS-authorized Acceptance Agent, which are available in most states and some foreign countries.

If you are applying for an ITIN at the same time you are filing your tax return, you may need to send the application and the tax return to the following address, instead of sending the tax return to the usual address to which tax-returns are mailed.

If you changed your name due to marriage, divorce or other legal reasons such as a deed poll, you should contact the social security administration (SSA) to have the change reflected, so as to ensure that there is no discrepancy between the IRS and SSA records, as that could result in the processing of your return being delayed.

To read more frequently asked tax questions, How do I file taxes for income from foreign sources?,Does everyone have to file a federal tax return?, How can I make sure I’m ready to file my taxes? and Common Tax Questions Answered.


If you feel you will be unable to file your tax return by the tax deadline, see Get A Six-Month Tax Extension.

Question answered by Denise Appleby, CISP, CRC, CRPS, CRSP, APA

According to the IRS, contributions to SIMPLE IRA plans that are taken from an employee’s pay check as a salary reduction are due within 30 days of the month in which the deferred payments were taken. For contributions taken from an employee’s pay in September, for instance, the contributions must be deposited into the SIMPLE plan by Oct. 30 of the same year. If the SIMPLE IRA is set up for someone who is self-employed and there are no employees, contributions that are reductions in pay must be deposited within 30 days of the end of the year – Jan. 30th. An employer may choose to make either matching contributions to an employee’s SIMPLE IRA, from 1% to 3% of his or her salary, or non-elective contributions of 2% of the employee’s salary no matter what the employee contributes. Contributions made on the part of the employer are due by the business’ filing due date for the tax year – usually April 15, or Oct. 15 if there is an extension. However, there are Department of Labor rules governing SIMPLE IRA plans that are different from IRS requirements. According to the DOL, an employer must make contributions that are taken from an employee’s salary to the IRA as soon as he or she can reasonably do so, but no later than 7 business days for businesses with fewer than 100 employees; this does not generally apply to owners with no employees or with only an employee who is a spouse. Contributions that are not made in a timely manner may incur fees or necessitate the filing of an amended tax return.

A SEP IRA, also known as a simplified employee pension plan, is an investment vehicle that allows business owners to contribute up to 25% of an employee’s compensation or $52,000 a year, whichever is less, to their employees’ retirement savings plans. This contribution must be made by April 15. Business owners can also open a SEP IRA account to invest in their own retirement savings plan. The cash contributions are deposited into an employee’s individual retirement account, also known as an IRA account or an annuity.

Employer contributions must be deposited into all employee’s SEP IRA accounts by that year’s tax-filing deadline, which is typically April 15 of the following year. But if the employer has an extension, then the final SEP IRA contributions date is the extension deadline date, which is usually Oct. 15.

For example: John earns an average of $50,000 a year at XYZ Corporation. The company wants to contribute 15% of each employee’s compensation into their SEP IRA accounts in 2014. This means John will receive a $12,000 contribution to his SEP IRA for 2014. XYZ Corporation has until April 15, 2015, to make the contribution to the employee SEP IRA accounts. If XYZ has filed a tax-filing extension until Oct. 15, 2015, then all contributions must be made for employees by that date.

Please note that SEP IRA contributions can be made in cash only, not property. Also, contribution amount limits are subject to change annually, based on cost-of-living adjustments. Other than contribution limits, all other rules for a SEP IRA are the same as a traditional IRA. This includes investment, distribution, and rollover rules.

The Canadian Pension Plan (CPP) is a retirement program from which contributing Canadians may receive payments at the age of 60 or upon a disability. The program, however, does not start immediately paying you upon retirement, disability or at the age of 60 because you must apply for payments. While deciding when to take CPP payments is a personal choice that you should make with a financial adviser, from a financial point of view it, may be wise to take these payments as early as possible.

Although you are not guaranteed to receive the maximum payments from the pension program, our example uses the maximum payment an individual can receive (as of 2005). Table 1 illustrates the maximum payments for the starting ages of 60, 65 and 70.

Table 1

Table 1 shows that the older you are, the more money you receive each month and each year. However, this does not tell the whole story; we need to look at the total that would be withdrawn over time. Table 2 shows three situations: taking contributions starting from the age of 60, 65 and 70 until the age of 90. The values in the table are simply the growing total value of the payments – without the contributions being invested.

Table 2

Table 2 shows that by taking CPP at the age of 60, you will have received a total of $215,822 by the age of 90. By taking it at 65 you will have a total of $258,570 and by taking it at 70, your total will be $271,488 by the age of 90. It is clear in the table that the later you take it the more you end up receiving in total if you were to live to 90.

However, the most interesting point the table shows us is how long it takes for those starting at the later ages (65 and 70) to catch up to the earliest date (60). If you were to take CPP at the age of 65 it would take you 11 years (when you are age 76) to catch up to the total value received by someone who had taken it at 60 years of age. If you started taking amounts at age 70, it would take 21 years (when you are 81) for you to catch up to someone who took payments at 60. This simple look at the CPP program does not take into consideration the investment of contributions but if the contributions were invested but it would take even longer for the 65 and 70 values to catch up to the value achieved by taking CPP at the age of 60.

The implications of what we show you here boils down to whether you want more now or more later. The higher monthly, annual and total payments received by those who start later may seem like a reason to hold off in taking your CPP payments. But, it takes many years to collect the same amount as someone who starts early, and there are no guarantees that you will live that long. If are not sure of what is best for you, it is wise to consult with your financial planner about taking the payments early.

Applications for Social Security benefits can only be processed a maximum of four months before benefits are scheduled to begin. Thus, the earliest you can apply is age 61 and nine months, and you can expect to receive your first payment four months later – the month after your birthday. However, benefit payments come after each full month of eligibility.

For example, if you turn 62 on December 15, your first full month of eligibility is January and your payment for that month will arrive in February. If you have already reached age 62 and met all other eligibility criteria, you may begin collecting benefits in the same month you apply, though your first payment would still not arrive until the following month.

Note that receiving Social Security at age 62, the earliest age at which you can receive benefits, means that you will receive a reduced payment compared to waiting for full (aka normal) retirement age, or even longer (until age 70) to begin. For details, see What is the difference between early retirement and full retirement as it applies to Social Security retirement benefits?

The Process

Applying for Social Security benefits is a fairly simple process. Applications can be submitted either online, over the phone or in person at your local Social Security office. The most convenient way to apply is through the online platform found on the Social Security Administration (SSA) website. The application itself takes about 10 to 30 minutes and can be saved at any point for future completion. In addition, this application can also be used to apply for Medicare.

It is generally recommended you apply three months in advance of when you would like to start receiving the checks. In order to ensure a quick and easy application process, it is best to have all the necessary information on hand before beginning. This can include, but is not necessarily limited to, the birth and marriage dates of your and your spouse, your Social Security number, proof of citizenship, tax information, employment history, military records, health insurance information and bank account information for direct deposit.

Sometimes, there are requests for documents, including original birth certificates, marriage licenses and tax returns. An agent usually contacts you if any clarification or additional documentation is needed. An agent also lets you know if you are eligible to receive more money through another person’s account, such as a spouse and if anyone else is eligible to receive benefits under your account.

Once you have completed your application and supplied all requested information, you are supplied with a receipt for your records as well as a confirmation number you can use to check the status of your application online after submission. You can also follow up over the phone or in person at your local Social Security office. Depending on your situation and what documentation may be required, your application may be approved within the same month you apply.

In addition, benefit payment schedules are now dictated by date of birth. For those with birthdays between the 1st and 10th, payments will be made on the second Wednesday of every month. For those born between the 11th and 20th, payment is made on the third Wednesday. For those born between the 21st and 31st, payments are made on the fourth Wednesday.

This means that if you turn 62 on December 15th, your first payment will arrive on the third Wednesday of the following February. If your birthday is December 15th and you are already over age 62, your first payment should arrive on the third Wednesday of the month following the month in which you apply. (If you’re already on Social Security, or receive both Social Security an…