The Pros and Cons of Early Retirement Plan Rollovers
Should you withdraw and reinvest your retirement plan money while you are still on the job?
Provided by Stuart Cooper, CRPC®, Gerran Batterberry & Michael Pozzi
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 In addition, 20% of the withdrawn amount is withheld for tax purposes.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 professional 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
Stuart Cooper, CRPC® may be reached at 847‐672‐1833 or [email protected]
Gerran Batterberry may be reached at 847‐672‐1291 or [email protected]
Michael Pozzi may be reached at 847‐672‐1292 or [email protected]
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note ‐ investing involves risk, and past performance is no guarantee of future results. 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 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. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
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