If you participate in a 401(k), 403(b) or 457 retirement plan at your workplace, you might think that you’re locked into the plan — at least as long as you remain with your employer. But this might not be the case.
Some employees would like more options and flexibility when it comes to investing their retirement funds than what’s offered by their workplace retirement plan. The good news is that, depending on the plan rules, it might be possible to withdraw funds from a workplace retirement plan without penalty and reinvest them in an IRA.
To briefly recap: Distributions from 401(k), 403(b) and 457 retirement plans before age 59½ are usually subject to a 10% early withdrawal penalty. The money is also subject to taxation at ordinary income tax rates. In this scenario, 20% of the amount withdrawn is typically withheld for the payment of taxes and penalties to the government.
Many retirement plans allow in-service withdrawals of retirement plan assets if participants can demonstrate a hardship, which is defined by the IRS as “an immediate and heavy financial need.” Some plans, however, permit what are known as in-service, non-hardship withdrawals while participants are still working for the plan sponsor.
This is accomplished via a direct rollover of funds from the plan into an IRA. When executed correctly, this kind of withdrawal will not result in a 10% penalty or 20% withholding. Important: You cannot take receipt of the funds yourself — they must be rolled over into an IRA within 60 days. Otherwise, taxes and penalties may be assessed.
Keep in mind that not all plans offer this option — only about half do, according to the Plan Sponsor Council of America. And among plans that do, there are sometimes restrictions, such as a minimum number of years of employment or 100% vesting in the account. You should talk to your plan administrator to find out if in-service, non-hardship withdrawals can be made from your plan.
When It Might — and Might Not — Make Sense
Taking an in-service, non-hardship distribution might make sense in the following circumstances:
- Your workplace retirement plan offers limited investment choices and you want to expand your options.
- You don’t have access to professional investment advice through your workplace retirement plan but would like such advice.
- You want to consolidate all of your retirement assets in a rollover IRA.
- You want to convert your retirement assets to a Roth IRA.
- You want more flexibility in naming beneficiaries for your plan assets.
Meanwhile, taking an in-service, non-hardship distribution might not make sense in the following circumstances:
- You are under age 59½, since the 10% penalty and taxation would still apply.
- You receive preferential pricing or fee reductions on investments made in your workplace plan.
- You own highly appreciated company stock within your workplace plan.
- Your state provides limited creditor protection for assets held in IRAs.
- You want to take advantage of unique features offered by your workplace plan (like plan loans, for example).
- Your employer makes matching contributions to your workplace plan.
We can help you decide if an in-person, non-hardship withdrawal from your workplace retirement plan makes sense for your situation. Give us a call if you’d like to discuss this in more detail.