Ask the Expert: Don't blame IRS for 401(k) rule

I'm 68 and still working. I expected to keep most of my savings in my employer's 401(k) plan in the Vanguard Retirement Savings Trust. It pays higher interest than I can get outside the plan. But I've been told that at 701/2, I must withdraw all funds from the 401(k) due to the Internal Revenue Service withdrawal requirement. This feels like age discrimination! Can they do this?

Yes. But don't blame the IRS. Your 401(k) plan is responsible for this rule. After age 701/2, tax law requires you to take minimum annual distributions from retirement accounts - but doesn't require you to empty them! And if you're still working at 701/2, you're not legally required to take minimum distributions from your current employer's 401(k) plan unless you own 5 percent or more of the company. (You still must take them from IRAs and former employers' 401(k) plans, however.)

The law says that when you leave a job, you must be allowed to stay in the 401(k) plan if your balance is $5,000 or more, but only until you reach normal retirement age. Then the plan can force you to withdraw your money even if you're still employed. Many plans don't do this, but apparently yours does - perhaps to avoid having to process annual required minimum distributions for retirees. When you turn 701/2, transfer your money directly into an Individual Retirement Account. Vanguard Retirement Savings Trust is a stable value fund, available only in employer-sponsored plans. As an IRA substitute, Vanguard suggests its Short-Term Bond Index Fund. Unlike a stable value fund, it fluctuates with the market, but over time it has provided a comparable total return.

The bottom line: A 401(k) plan's rules can be less generous than the law.

Info about 401(k) plans on the Web at bit.ly/b7TdYx. For more on retirement portfolios, visit bit.ly/9P6zkv.