Did you know you might be able rollover funds from your 401(k) to an IRA while you are still working for your employer?
This blog post is only intended to make you aware of a possible option called “in-service withdrawal” or an “in-service distribution.” Always consider the pros and cons for both a 401(k) and an IRA before making any changes to your account.
Most people know that when you leave a job you can roll over 401(k) funds into your own IRA.
It’s also possible that your company allows active employees participating in a 401(k) plan to withdraw a portion of their plan’s account balance upon request, without demonstrating a specific financial need. Some retirement plans allow what’s called an “in-service withdrawal” or an “in-service distribution.” In-service means you are still working for the employer sponsoring the 401(k) plan.
Employees might consider a 401(k) withdrawal for the following reason:
- Seeking different investment choices other than what a 401(K) plan offers.
- Interested in a different investment process that might be more customized.
- Fees and expenses could be more favorable.
It’s important to note that a normal withdrawal is typically treated as ordinary income and could trigger a tax liability. In addition, if you’re under age 59 1/2, you could be subject to a 10% early withdrawal penalty. However, by taking the "in-service, non-hardship employee withdrawal" and rolling it over into an IRA within 60 days, you will continue to benefit from tax-deferral status without an immediate tax liability or penalty.
Expect certain requirements if your retirement plan permits in-service, non-hardship employee withdrawals. This may include a minimum age restriction (usually age 59 1/2), a length-of-service requirement (often two or five years) or both maybe required. Employer-sponsored retirement plans often limit these withdrawals to vested employer matching contributions, plus earnings, as well as rollovers and earnings from previous employer plans. Some plans allow employees age 59 1/2 and older to withdraw their entire balance without any further restrictions. Also many plans require spousal consent in writing for in-service withdrawals from a 401(k) account.
Ask your employer which assets in your plan are eligible for withdrawal:
- After-tax contributions, plus earnings?
- Rollover amounts, plus earnings?
- Company match contributions, plus earnings?
- Before-tax contributions, plus earnings (if disabled or age 59 ½)?
You can follow these steps below if this is something you are considering.
Next steps for an in-service, non-hardship withdrawal:
1. Ask the retirement plan administrator the following questions:
“Can I take an in-service withdrawal?”
“Which assets are eligible?”
“Is there a withdraw limit?"
“Does the plan imposes penalties for these withdrawals?”
“What are the processing requirements and distribution timelines?”
2. Contact your Tax Advisor regarding potential tax implications.
3. Contact your Financial Planner to discuss pros and cons of a 401(k) withdrawal.
Advantages Keeping Funds in Your 401(k) Plan
- Although both an IRA and a 401(k) have government-mandated limits on the amounts of pre-tax dollars that can be placed in them per year, the maximum for the 401(k) is considerably higher.
- Many employers make matching contributions to their employee's 401(k) accounts, typically as much as 50 cents on the dollar for up to 6 percent of the employee's salary. That amounts to free money being deposited and compounding in your retirement fund.
- You can generally borrow money from a 401(k) without penalty (as long as you pay it back).
- Under certain circumstances, you can withdraw money from your 401(k) before you reach age 59½; for instance, if you need it to pay medical bills. To qualify, the expenses would have to be tax-deductible; in other words, they must exceed 7.5 percent of your adjusted gross income. You can also make early withdrawals of 401(k) funds if you become disabled.
- Additionally, some mutual funds that normally charge a load (or, sales fee) may forego the charge when you invest through a 401(k) plan.
- With a 401(k) plan, the money is automatically taken out of your paycheck and put your retirement plan, thereby reducing the taxable income that's reported on your W-2. With an IRA, you declare the amount of the contribution on your Form 1040 and the corresponding amount is subtracted from your taxable income.
For more retirement information go to:
Sources: IRS.gov, Merrill Lynch, Transamerica, FinWeb
This content was produced to provide information on a topic that may be of interest and developed from sources believed to provide accurate information. This information is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.
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