Many employee sponsored plans now offer what is called an "In-Service Rollover or Withdrawal". These special provisions allow you to take control of your retirement plan sooner by rolling part or all of your plan assets into an IRA while still working. Each plan is uniquely written, so not all plans offer these options. Most often, plans who do offer this usually do so after you are 55, and even more likely after you are 59 1/2. Some plans have further restrictions, such as only allowing two rollovers per year. For many University sponsored plans, you could be restricted in only being able to withdraw or rollover funds 10% at a time. As mentioned before, every plan is different, but it is relatively easy to discover if your plan offers such rollover benefits. Rolling the funds over to an IRA would allow you to further diversify beyond the fund line-up in your plan. There are many reasons to rollover, but also many reasons not to. Please consult with a financial advisor before making such a decision.
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In-Service Withdrawals from Employee Retirement Plans
You might be able to take money out of your 401(k), 403(b), or 457 plan while still working.
Provided by Friendly 401k
If you withdraw money out of a workplace retirement plan in your fifties, will you be penalized for it? In most cases, the answer is yes. Distributions taken from a qualified retirement plan before age 59½ usually trigger a 10% IRS early withdrawal penalty. The key word here is “usually,” for there are ways to make these withdrawals with no IRS penalty, even while you are still working for your employer.
You may have a strong reason to make such a withdrawal. Maybe you want the money now. Maybe you are tired of your plan’s limited choices and high fees and want to invest those assets in a different way. In fact, some of these withdrawals are made just so the assets can be transferred to an IRA. An IRA allows you many, many more investment options than the typical employer-sponsored retirement plan.1,2
You can avoid the 10% penalty through an in-service, non-hardship withdrawal. Some 401(k), 403(b), and 457 plans permit such distributions for plan participants who are still working. You may be able to arrange one, but you must pay attention to the rules.2
Different plans have different requirements for these distributions. Some only permit them if the employee has worked for the company for at least five years. Others shorten that obligation to two years. A plan may only let employees have this option starting in the calendar year in which they turn 59½. Employees are sometimes unable to withdraw their whole account balance. Spousal consent, in writing, may also be required.2
You need to know the mechanics of the distribution. Can you withdraw your earnings as well as your contributions? Can you withdraw any matching contributions your company has provided? Is there a dollar ceiling on this type of distribution? Does the plan itself penalize such withdrawals (as opposed to the IRS)? Finally, you will want to ascertain the timeline of how long it will take to distribute the assets.
What are the potential drawbacks to doing this? When you take an early distribution from a 401(k), 403(b), or 457 plan, you do so with a strong conviction that you are putting that money to better use or directing it into a better investment vehicle. There is always the chance that time could prove you wrong. Taking the money out of the plan may also mean losing out on future company matches. Also, while you can currently put up to $24,000 a year into a 401(k), 403(b), or 457 plan starting at age 50, the annual contribution limit for a Roth or traditional IRA is only $6,500 once you turn 50.3
If you need the money for an emergency, taking a loan from your plan might be a better option. If you just take the funds out of the plan without arranging a direct rollover (trustee-to-trustee transfer) to an IRA, every dollar you pocket will be taxed because the IRS considers a lump-sum retirement plan withdrawal to be regular income.2,5
Should your current workplace retirement plan prohibit in-service, non-hardship withdrawals, take heart: you can reach back and withdraw funds from 401(k), 403(b), and 457 accounts held at past employers after you turn 59½. So, if you have an old employer retirement plan account, you could go this route instead; though, the balance of that account might be relatively small.4
Speak to a financial professional before you do this. A trustee-to-trustee transfer is one way to do it: you never touch the money, and the funds can go straight from your plan into an IRA with no tax ramifications resulting from the transfer. That move is ideally made with a financial professional’s help.5
A Friendly 401k representative may be reached at 1-866-481-3597 or firstname.lastname@example.org
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 - irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions [8/25/16]
2 - titanfinancial.net/blog/how-to-rollover-401k-funds-while-still-working-for-employer [4/24/16]
3 - forbes.com/sites/ashleaebeling/2016/10/27/irs-announces-2017-retirement-plans-contributions-limits-for-401ks-and-more/ [10/27/16]
4 - thebalance.com/what-age-can-funds-be-withdrawn-from-401k-2388807 [8/16/16]
5 - al.com/business/index.ssf/2017/01/avoid_this_costly_ira_rollover.html [1/4/17]