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Employer can't touch 401(k)s

Question: If the company I work for goes bankrupt, would my 401(k) assets be affected? Do the same rules that apply to pensions apply to 401(k)s?

Answer: Money in a 401(k) is actually safer in the event of an employer bankruptcy than money in a company pension plan. The money in a 401(k) must be held in a trust that the employer can't touch, even if it's having financial trouble. With a few minor exceptions, "there's no legal way for an employer to get its hands on your money after it has been sent off to the service provider," says Temple University business professor Jack VanDerhei, who also works with the Employee Benefit Research Institute.

In some cases, however, employers have raided 401(k) money after it was deducted from employee paychecks but before it was deposited into the trust. "In instances where companies fail to put the assets in trust in a timely manner, we take action to enforce the law," says Assistant Secretary of Labor Ann Combs.

If you suspect a problem with your employer, contact the Labor Department's Employee Benefits Security Administration (call 866-444-3272). The agency recovered $764.8 million for participants in 401(k)s and similar savings plans in 2004.

The best way to protect yourself from an employer bankruptcy is to diversify your 401(k) investments rather than load up on your company's stock in your account.

Question: I recently withdrew funds from a Roth IRA and received a check in the mail. I deposited the money into my checking account and then into another Roth IRA. Will I be penalized for making this withdrawal?

Answer: You shouldn't be penalized as long as you reinvested the money in another Roth IRA within 60 days. But you could have streamlined the process by having the money transferred directly from one IRA administrator to another.

The first Roth IRA custodian does not know that you rolled over the funds into a second IRA. So it will report the withdrawal to the IRS, and come January you'll receive a Form 1099-R showing the amount, says Bob Scharin, editor of Warren, Gorham & Lamont/RIA's "Practical Tax Strategies." You'll need to report the amount on your tax return, but don't treat it as a taxable distribution, says Scharin.