Holland Column

Retirement & Financial Planning

Holland Financial

Withdrawing and Repositioning 401(k) Monies

Did you know that you can take money from your 401(k) before retirement? The technical term for this withdrawal is an “in-service distribution.” When an employee turns 59½, most employer-sponsored retirement plans, like 401(k)s, allow a person to make withdrawals from his or her account while still being employed with, or “in the service” of, the company. Typically, this is done to roll all, or a part, of the 401(k) balance into an IRA before retirement – a financial move thatdoesn’t trigger income taxes when done properly. So, why would someone want to do a rollover? There are many reasons. For instance, they might want to gain access to:

1. A broader range of investment choices. Sometimes, the offerings of an employer’s 401(k) plan can be quite limited. An investment firm managing an IRA, on the other hand, may have access to a very large pool of investments from which to choose.

2. Professional investment advice. No one says that you can’t have an investment adviser guide you on your 401(k) holdings. However, hiring an adviser might not be a benefit to you if there are only a handful of choices. If you are paying for an adviser’s time, you may want to get the most bang for your buck.

3. More conservative and fixed investment options. You may be uncomfortable having all of your 401(k) money in stocks and bonds. By rolling the money into an IRA, you could exchange the uncertainty of the market for bank and insurance company products which may be more appropriate for your situation. This is especially important as you get closer to retirement (e.g. within five years).

4. More determinable income alternatives. As we approach retirement, our focus needs to shift from pure accumulation and growth to reliability of income. Rolling part of a 401(k) into a fixed annuity, for example, before you retire could mean that you have another source of income waiting for you when you stop working.

5. Ease and speed of distributions. It may take a lot longer to receive a requested distribution from the company that holds your 401(k) funds. There might be lots of “hoops” to jump through to get money quickly. On the other hand, an investment advisory firm, with a nimble and capable customer service department, can usually process a distribution check within two or three days.

Wait! Don’t call your plan provider to request your “in-service” distribution just yet! First, before you make any changes to your 401(k), get professional help. Errors in the process of an in-service distribution or IRA rollover can have very serious tax consequences. Make sure the transfer is carried out properly. And, secondly, don’t “gamble” with your retirement funds. Pulling these funds out of your 401(k) and transferring them to overly complicated, speculative or illiquid investments can result in a personal financial disaster! Don’t be in a rush. Get a second opinion on your plans if you are not confident. Be careful, and smart, with your hard-earned retirement dollars!

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