Did you know that you could safely withdraw money from your employee retirement plan at or before 59 ½ years old if your employer offers in-service withdrawals? If not, you are like a lot of Americans, simply unaware of the untapped potential of your retirement plans.
Whether it is a 401(k), a 403(b), a 501(a), or anything else in between (including federal TSP), there is an opportunity to capitalize on the in-service withdrawal provision by the IRS.
Note: although we will refer to the 401(k) throughout this article, this code provision applies to all ERISA-qualified, employer-established defined contribution plans, so all the previously mentioned retirement plans can be eligible for the same provision offered by the IRS.
Let’s face it: many of us would like to take the assets stored away in our retirement plans and utilize them for life’s important moments: to retire early, for college, or to invest and watch it grow further. So, here’s how it works: some companies allow active employees participating in a qualified employer retirement plan like a 401(k) to withdraw a portion of their plan’s balance upon request, without indicating a specific or immediate financial need.
In many cases, these provisions are made for employees who are 59 ½, but some companies may consider an employee’s length-of-service eligibility. Some employees can even withdraw their money at 50 or 55 depending on their occupation or their company’s policies. In short, some plans allow employees age 59 ½ and older to withdraw their entire balance without any further restrictions.
It is important to note that these provisions do not apply to IRA accounts. Retirees looking to withdraw their retirement savings can distribute their assets to IRA accounts to maintain a penalty-free distribution—not the other way around. If this rollover is not done correctly, it becomes a costly mistake.
Each employer-funded retirement plan is different. Be sure to connect with your employee to discuss your options and which retirement plans are eligible for in-service withdrawal. Below are some of the plans that can qualify:
• Rollover amounts, plus earnings
• Before-tax contributions, plus earnings (if you are disabled or have reached age 59 1/2)
• Company-matched contributions, plus earnings
• Rollover amounts, plus earnings
Your future and the future of your loved ones are undoubtedly important to you. A myriad of reason can arise, and this may prompt you to want to capitalize on an in-service or non-hardship withdrawal.
If you decide to discuss your options with a professional financial planner, you will have access to a wide range of investment options, including stocks, bonds, exchange-traded funds, and mutual funds. Above all, your wealth advisor can provide you with an all-inclusive asset allocation and asset investment management plan for your portfolio. They can also consider and help you to map out your goals and risk tolerance, as well as the tax laws governing dividends and capital gains.
Here is something to think about: In-service rollovers can give you the freedom to leave money to your children and grandchildren. The rules are different when these family members are involved. For example, a spouse who inherits a 401(k) or an IRA can easily migrate those savings to their own IRA with all the provisions that the original had. Children, grandchildren, and all other non-spousal heirs who inherit an IRA do not have that luxury, but they can keep money in an in-service IRA (inherited IRA) and potentially prolong withdrawals and tax deferrals for years.
Your retirement income can vary widely depending on what type of IRA holds your savings and what assumptions you make about returns and tax rates during the accumulation and withdrawal periods. Use this calculator to help estimate your monthly and annual income from various IRA types.
Step 1: Contact your company’s HR department and simply ask, “Does my retirement plan offer in-service withdrawals?”
If your retirement plan offers in-service withdrawals and you are also eligible to receive the withdrawal, you may proceed to ask the following questions:
Step 2: Contact a tax advisor to discuss your options
Step 3: Contact a financial planning or wealth advisement firm to discuss rollovers to an IRA
According to Think Advisor, “Although the counterargument to the annuity within an-IRA strategy is that both vehicles offer tax deferral benefits that can make housing the annuity within the IRA redundant (at least from a tax perspective), for the risk-adverse client who is approaching retirement age, the strategy can make sense. For these clients, the certainty that hard-earned retirement funds are protected against market volatility in the years leading up to retirement can prove invaluable.”
No matter what path you choose, your financial future and that of your family is important. Discuss all of your options with a professional wealth advisor to ensure you are achieving the best-laid plans for your retirement and beyond. 59 ½ may be the right time for you to consider growing your future, or you may choose to wait and consider every avenue before proceeding.
No matter the decision, the professionals at Achieva Wealth can help you with your retirement options.
Resource Guide Forbes, The Great 401k Escape
Think Advisor, Safeguarding Retirement With 401(k) Plan In-Service Withdrawals, Sept. 2014
Bankrate, 401(k) Hardship Withdrawals On the Rise
* For a comprehensive review of your personal situation, always consult with a legal or tax advisor. Neither Achieva Wealth Advisors nor any of its representatives may give legal or tax advice. The content is developed from sources believed to be providing accurate information. The information in this material 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. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and materials provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2015 FMG Suite.