The Pros and Cons of Early Retirement Plan Rollovers – Presented by Mark K. Lund, Financial Planner

Should you withdraw and reinvest your retirement plan money while you are still on the job?

Did you know you might be able to take some or all of the money in your 401(k), 403(b), or 457 plan and roll it over into another type of retirement account? Were you aware that you could do this while you are still working for your current employer – without any withholding or early withdrawal penalties?

Let’s look at how these rollovers can happen and the pros and cons of making them.

Some 401(k), 403(b), and 457 plans offer this kind of flexibility. If your plan provides this choice, you must first pay attention to the rules.

To start, some basics. Distributions from 401(k) plans and most other employer-sponsored retirement plans are taxed as ordinary income, and if you take one before age 59½, a 10% federal income tax penalty commonly applies. (The 2020 CARES Act allows some one-time exceptions to penalties this year.) In addition, 20% of the withdrawn amount is withheld for tax purposes. Generally, once you reach age 72, you must begin taking required minimum distributions.1

Now, the fine print. You may be able to take money out of your plan in your fifties or sixties, while still working, via an in-service non-hardship withdrawal by arranging a direct rollover of these assets to an Individual Retirement Account (IRA), avoid both the 10% penalty and the 20% tax withholding in the process.2

An IRA may give you a wider range of investment options than many employer-sponsored retirement plans. If you are dissatisfied with the range of choices your plan presents, this alone may motivate you to make a direct rollover.3

You should certainly speak to a financial planner with the knowledge to help you coordinate a direct rollover (also called a trustee-to-trustee transfer). A direct rollover moves assets from your workplace retirement plan into an IRA without a taxable event.2

Generally, distributions from traditional IRAs must begin once you reach age 72. The money distributed to you is taxed as ordinary income. When such distributions are taken before age 59½, they may be subject to a 10% federal income tax penalty; although, the CARES Act allows some exceptions to these penalties in 2020. You may continue to contribute to a Traditional IRA past age 70½ under the SECURE Act as long as you meet the earned-income requirement.4

The criteria for making in-service non-hardship withdrawals can vary. Some workplace retirement plans simply prohibit them. Others permit them when you have been on the job for at least five years or when assets in your plan have accumulated for at least two years or you are 100% vested in your account.2

In addition, you will want to ask your employee benefits or human resources officer some questions. How long will a direct rollover take? Is there a dollar or percentage limit on how much can be rolled over? Can you withdraw and roll over matching contributions as well as your own account contributions and earnings?

Weigh the pros and cons. Who knows if your reinvested assets will perform better in an IRA than they did in your company’s retirement plan? Only time will tell. Right now, you can put up to $7,000 into an IRA, annually, if you are 50 or older; that pales in comparison to the $26,000 yearly contribution limit on a basic 401(k), 403(b), or 457 plan. Lastly, if your employer matches your retirement plan contributions, getting out of the plan may mean losing future matches.5

If you ever have any questions about your investments or retirement plans, please feel free to give me a call at 801-545-0696.

 

Sources:
1 – IRS.gov, February 20, 2020
2 – DWC401k.com, May 10, 2020
3 – CNBC.com, April 21, 2020
4 – Investor.Vanguard.com, May 10, 2020
5 – IRS.gov, November 6, 2019

This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This material was prepared by MarketingLibrary, Inc., for Mark Lund, Mark is known as a Wealth Advisor, The 401k Advisor, Investor Coach, Financial Advisor, Financial Planner, Investment Advisor and author of The Effective Investor. Mark offers investment advisory services through Stonecreek Wealth Advisors, Inc. a fiduciary, independent, fee-only, Registered Investment Advisor firm providing investment and retirement planning for individuals and 401k consulting for small businesses. Mark’s newsletter is called The Fiduciary Report. Cities served in Utah are: Salt Lake County, Utah County, Park City, Salt Lake City, Murray, West Jordan, Sandy, Draper, South Jordan, Provo, Orem, Lehi, Highland, Alpine, American Fork.

Category: Articles, Blog

About the Author ()

Mark K. Lund is the author of The Effective Investor, a #1 Best Seller, and founder of Stonecreek Wealth Advisors, Inc. an independent, fee-only, Registered Investment Advisory firm. He has provided articles for or been quoted in: The Wall Street Journal, The Salt Lake Tribune, The Enterprise Newspaper, The Utah Business Connect Magazine, US News & World Report, and Newsmax.com, just to name a few.  Mark publishes two newsletters called, “The Mark Lund Growth Report” and “Mark Lund on Money.”  Mark provides CPE (continuing professional education) courses for CPAs.  You may also have seen him on KUTV Channel 2, or as a guest speaker at a local association or business. Mark provides investment and retirement planning services for individuals and 401(k) consulting for small businesses. In his book, The Effective Investor, Mark exposes the false narrative magazines, media, big Wall Street firms, and most advisors want you to believe. The good news is that Mark will show you that you don’t need their speculative ways of investing in order to be a successful investor. Get a free copy when you schedule your initial consultation.

Comments are closed.