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Don CPA-CFO, Certified Public Accountant (CPA)
Category: Finance
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Experience:  Licensed CPA, CFO of Businesses from $10-200 mil., Entrepreneurial coach & consultant - 17 yrs exp.
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As a Northrop Grumman retiree with a company 401K I have questions

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As a Northrop Grumman retiree with a company 401K I have questions regarding the resent announcement of Northrop Grumman's spin off of it's ship building secton to Huntington Ingalls Industries. I have Northrop Grumman stock and just received the announcement this evening via mail with very little time to act before the transition takes place next week and the benefits site is unavailable to transfer funds out -- if it is wise to do so. There is terminology in the announcement I don't understand and the benefits site is closed until Monday. The site is closed for access Wednesday leaving little time to try and get additional information. If you are unfamiliar with the spin off or if this is not the correct contact category please advise me so I can change the category or seek advise elsewhere.
I received a letter after the benefits office was closed. The letter indicated that all of my Northrop Grumman stock in my savings plan would be spun off to Huntington Ingalls next week and I would recieve 1 Huntington Ingalls share for every six Northrop Grumman shares. A tax free distribution was mentioned and that I could sell shares once transfered but the short notice and the little I have learned about Huntington Ingalls sounds like not such a good deal to me. I was advised in the letter to consult my tax and or financial advisor prior to buying or selling but this is the weekend and I don't have a tax or financial advisor to consult at this time. Huntington Ingalls will carry a large debt and the ship building industry is uncertain however there was mention of a tax free distribution. If you are familiar with the transaction or can offer some insight and advise it would be helpful while I also try to obtain additional information. Thanks.



I understand your question and, since I don't have a copy of the letter you received, I am not sure what the timeline is exactly for you to make a decision, but I do know that you do not feel confident about your potential choices.


Since this is a 401k, you will have the option of taking a distribution of the entire amount and rolling the 401k into an IRA. This is especially useful if the investment choices of the 401k are no longer to your liking or you are uncertain about them. While I am not familiar with the Northrup-Grumman plan (although I am an Navy vet who was on the commissioning crew of the USS Theodore Roosevelt (CVN-71)) built at NN Shipbuilding & Drydock Co), it sounds like you are invested in only their stock through this plan. You possibly have other investments in funds offered by the plan as well. All of these investments can be mirrored in an IRA account, should you choose to do so.


To be very clear, taking a distribution from a 401k plan and rolling it into an IRA (or other qualified plan) is very simple. Any company that offers IRA accounts (banks, mutual fund companies like Vanguard, American Century, etc., brokerages like E*Trade or Charles Schwab or insurance companies) will help you through the process if you open an account with them or roll into an existing account.


So, with the limited knowledge I have of your personal situation and risk tolerance, I would recommend that if you don't have an investment ad visor, you simply opt out of the new company stock/plan and take a full distribution of your account. Then you will have bought some time to roll it into an account of your choosing outside of the plan. Here are some rules for the rolling over of a 401k plan:


Below are the options that are available to you.

  • Take a Cash Distribution
    If you elect to receive a cash distribution then the check is made payable to you. Distributions made payable to you are subject to federal and state income taxes. Your employer is required to withhold 20% from your distribution check as a prepayment of estimated taxes. Depending on your tax bracket you may owe more or less than 20% when you complete your tax return. In addition, your distribution is likely to be subject to a 10% pre-mature withdrawal penalty if you are under age 59 ½.

  • Indirect Rollover
    You can elect to take a cash distribution and then deposit the money into your IRA within 60 days. Your employer is still required to withhold 20% for prepayment of federal income taxes. To avoid taxes and penalties, the entire distribution including the 20% withheld for income taxes must be deposited into your IRA. If any amount , including the 20% withholding, is not rolled over within 60 days then that amount will be subject to taxes and possible IRS penalties.

  • Direct Rollover
    With a direct rollover, you authorize your employer to make your check payable directly to the new custodian for the benefit of your IRA. For example, the check would be made payable to the new custodian FBO XXXXX XXXXX. This is sometimes referred to as a trustee-to-trustee transfer and there is no tax withholding, no taxes, and no penalties with this option. Your retirement savings will continue to grow tax-deferred. In most situations, a direct rollover makes the most sense since it avoids potential tax liabilities and penalties.


Make sure you meet all of the requirements of the letter you received.


Based on what you told me, this is all I can offer at this time by way of an answer. I hope this helped! If it did, please let me know.


I am very grateful for the question and I know you will work your way through this.


Best of luck!


if you appreciated my answer, please leave feedback for me after payment, if you need more info, please ask. Thank you very much!

Customer: replied 6 years ago.
The spin off is to occur next week so there is no time I think for the options you mentioned. I understand the suggestions you made and have considered in the past but was in no rush..Thanks but I understand the difficulty of responding with the information available to me. Iwill try to reach my company benefits call center in time hopefully to do something on Monday if I can get through and also continue to seek additional information.

Customer: replied 6 years ago.
FYI. The spin off information is viewable on the Northrop Grumman benefits web site or google search.I hope that may help a little. I am using my droid so a little difficult to type.

I read the info on your benefits site and it looks like you can't do anything until after the transition takes place.


Once that has happened, all of the normal plan functions will be reestablished and you be able to make elections as to where your funds are allocated.


Based on your initial message you indicate that you own stock through the stock fund. You will automatically receive shares of the new company stock. Only after that happens can you follow the recommendations of my original message.


All of my original comments still apply. If you aren't comfortable owning shares of the new company in your plan, you should roll to either another fund in the plan (if allowed) or out to an IRA.


I imagine many if not most people in this plan have the same questions as you do. You may want to contact the benefits administrator with specific questions related to your particular circumstances.


As a general rule, I am against keeping money in a 401k plan of a former employer. It limits the choices of investments you can make.


Hope that helps. Good luck!

Don CPA-CFO and 2 other Finance Specialists are ready to help you
Customer: replied 6 years ago.
Thanks for the additional follow up. Perhaps I will still have time before the site is down to transfer tTo another investment within the 401k.