Does the money you accumulate in your employer-sponsored pension plan have to stay until you leave your job or retire? You may be surprised to find that in some cases the answer is no. You may already be able to transfer money from your 401 (k) or 403 (b) pension plan to an IRA even if you are still employed by the company. These "first transfers" are known as in-service distributions. The term refers to the ability to withdraw money from your work plan while you are still working (on duty) on behalf of the employer.
The option is not available for everyone. Your employer-sponsored plan must include provisions for in-service distributions. If the plan allows, participation may be limited to those aged 59 and over. Check with your plan administrator or see the summary plan document for your situation.
Become the owner of your retirement savings
If you have the opportunity to continue an in-service distribution, some of the benefits include:
- Control - The money from your workplace retirement plan is yours, but you may feel that you have limited control. The rules that control everything from investment options available to distributions are regulated by the plan.
- Choice - Some corporate pension plans offer a limited number of investment options. An IRA, on the other hand, generally includes a greater choice of investments, which can help you diversify your portfolio.
- Flexibility - IRAs generally facilitate the splitting of assets between different beneficiaries. You can create separate IRA accounts, by naming a different beneficiary for each. This is not possible with a occupational pension plan. The money from an IRA can also be directed to a trust, which allows you to better control the distribution of your assets after you leave.
When it makes sense to keep money in your work plan
In-service distribution is not the best choice for everyone. In some cases, it is best to keep your money in an employer sponsored retirement plan:
- High percentage of employer shareholding. If part of your 401 (k) money is invested in shares of the company, it may be wise to keep those dollars in the employer-sponsored plan. In some cases, people have been able to take advantage of the tax-saving provisions with this title when transferring money from the plan and selling it in the future. These provisions are not available if the stock is transferred to an IRA.
- Creditor protection. In addition, federal legislation protects the assets of qualified plans sponsored by employers. When assets from a qualified plan are transferred to an IRA, they retain federal protection in the event of bankruptcy. However, creditor protection is determined by state laws.
- The age of retirement. With qualified plans, participants who stop working in the year when they reach the age of 55 or older can make withdrawals without the premature distribution penalty of 10% of the IRS. With an IRA, you can not usually make withdrawals without penalty before the age of 59 and a half (some other exceptions apply). For this reason, if you plan early retirement, you can maintain access without penalty by leaving your retirement funds in your 401 (k).
- Money after tax. If you transfer after-tax money into an IRA, that money will not be available separately. Therefore, before proceeding with an in-service distribution in an IRA, make sure you understand if the after-tax money will be included and how the carry forward of that money may affect you. Another strategy may be to convert your after-tax contributions into a Roth IRA. After-tax money conversions into a Roth IRA are not taxable (only conversions of the corresponding earnings are taxable) and eligible earnings distributions are tax-free.
- Fresh. Be sure to consider investment costs as 401 (k) plans may include less expensive investments at institutional prices. In addition, keep in mind that an IRA may have investment options with features that you will not find in a 401 (k) plan at any cost.
Handle with Care
One of the keys to an in-service distribution is to make sure the failover is executed according to the rules. As with any transfer of funds from a retirement plan, the money must be transferred directly from the business plan to the custodian of your IRA. If the money is first sent to you instead, an automatic 20% tax deduction is applied and the distribution may be subject to additional taxes and a penalty.
If money is transferred directly between the plan and the IRA custodian, the tax-deferred status of the dollars accumulated in your retirement plan remains unchanged and will remain unchanged within the company. 39; IRA.
In addition, it is important to note that some employer plans may temporarily prevent new contributions from participants who receive an in-service distribution that exceeds a specified amount. Be sure to discuss the consequences of any withdrawal with the plan administrator.
It is important to make sure that the money is invested in a manner consistent with your long-term goals and your level of risk tolerance. Do not forget that your retirement savings represent your future financial security. This money must be managed efficiently and protected against unnecessary risks. The choice of in-service distribution can be complicated. Discuss your IRA options and tax considerations with your financial and tax advisors.