For Generation X clients, the majority of their retirement savings are in the company 401(k). While you do have a multitude of options of what you can do with your 401(k) if you leave your employer, often people feel like they are stuck if they stay with the same employer for a long period of time. This is especially true with larger companies as most of those plans offer a limited number of investment choices and several target retirement funds. I’m amazed that many people I sit down have never heard of whether their company offers an in service withdrawal or an in service distribution which can give them greater investment control of their 401(k) assets. Since we have had two major market meltdowns over the past 12 years, 401(k)’s offer limited power to help you risk mitigate against a market crash. This is why you need ask your employer today, do we offer an in service distribution?
So, just how does this concept work?
- Some plans will offer this and some will not. It specifically comes down to what was written in your company summary plan description. It doesn’t only work for 401(k) plans. It can work for 403(b) plans, 457 plans, and Thrift Saving Plans as well.
- You don’t necessarily have to be the age of 59 ½. Many plans have much more liberal language about how much you can take out or rollover to an IRA when you reach 59 ½, but big companies like Turner offer the in service distribution for those under the age of 591/2 (www.turner.com). If you call me, I can tell you over 250 big companies that offer this provision.
- You must make sure that if you choose this election, you actually process the rollover to an IRA. This way you can avoid IRS taxation (and possibly penalties) on this money.
- Make sure the paperwork is accurate. Some places like Fidelity will process the check right over the phone while other companies and plans may ask for you to fill out paperwork. Make sure you fill it all our correctly so you don’t make a mistake and cost yourself money.
Generally, when you decide to rollover money from a 401(k) plan to your own IRA while still working for your currently employer, here will be the contributions that will be available. Again, it will depend on your summary plan description.
- Your employer contributions including match and profit sharing
- Your personal after-tax contribution
- Your pre-tax contributions when you hit the age of 59 ½
By getting these assets in your hands you typically will have much greater control. This could allow you to buy investments that may be lower cost and may give you a wider range of investments to choose from including stocks, bonds, real estate, and much more. By possibly having more choices, this may allow you to build a much more diversified portfolio generally than you could in your 401(k) plan. Diversification does not ensure against a loss nor guarantee a profit. Last, IRA’s will allow you to select other beneficiary designations beyond your spouse. This is much more difficult within 401(k) plans.
So, if this is so great then why doesn’t everyone take advantage of doing an in service distribution?
- People don’t understand it – If you are 50 years old, it can be scary that taking the money might cause you some big penalty or a huge tax bill. Make sure you go through the facts with a professional or your 401(k) company to understand the rules.
- Net Unrealized Appreciation – There are certain tax rules with company stock in a 401(k) plan that may cause you higher taxation than necessary if not distributed correctly. Be sure to consult with your financial advisor or CPA as this needs to be done correctly to get the special tax treatment.
- New Contributions – Based upon the in-service distribution you take, you could affect the amount you can put into the plan in the future. This is why is will be important to talk to your 401(k) vendor or your benefits department.
- Cost – While doing the right thing with your money can make it cheaper for you, doing the wrong thing could actually cost you more money like paying a steep commission to invest your money.
Nobody can be certain when the next market meltdown will be. With many Gen X’ers now between the ages of 35 and 46, you have to keep your eye on what will be the bulk of your retirement assets. Ask your benefits department whether or not your plan allows for an in-service distribution. This may allow you to take greater control of your financial future!
Visit to www.oxygenfinancial.net to request a free consultation with the leading financial experts for people in their 20’s, 30’s, and 40’s in the country.
Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder of oXYGen Financial, Inc – The Leaders in Gen X & Y Financial Advice
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