A Little-Known 401(k) Strategy Lets you Have your Cake and Eat it Too

June 24, 2019

It’s human nature to want to exert control over our stressors, and who among us has never felt fear when it comes to retirement planning?  While we have no control over market performance, a good financial advisor can often suggest strategies you’ve never heard of that can give you more control and potentially boost your retirement savings.  One of these is the “in-service rollover.”

As we briefly mentioned in our last post, some 401(k)s, and other employer-sponsored plans, offer participants of a specified age, usually 55 or older, the option to transfer some portion of their savings to an IRA, without taxes or penaltiesevenwhile they are still employed and contributing to their employer-sponsored plan.If your company provides a matching contribution, you’ll still reap the benefits of that as well.

So, let’s go over a few of the advantages of an “in-service rollover”:

  • You want more control over your account. With an IRA, you are an account owner, whereas with an employer plan, you are a plan participant.  Guess who gets to call the shots in your plan? Not the participants. Your employer chooses a plan administrator, and together they determine which investments to offer. Often the choices are limited and the investment fees high, particularly in smaller companies.

Be aware that investment companies often accept legal revenue sharing arrangements from employer-sponsored plans for offering their mutual funds, yet these options don’t necessarily perform any better than other funds that don’t “pay to play.”

  • You want more diversification. With an IRA you can own any stock, bond, ETF or mutual fund available. You won’t be limited to the frequently expensive options within your employer plan. If you are working with a financial advisor, you can rebalance this often-significant portion of your savings into a more appropriate and well-diversified asset strategy. This is particularly important as you get closer to retirement.
  • You want more flexibility.  IRAs allow certain penalty-free withdrawals — for medical expenses, disability or higher education expenses — that are not allowed in most employer-sponsored retirement plans. While we wouldn’t recommend this as a first choice for funding in these situations, it can be nice to have the option as a last resort.
  • You want to give your beneficiaries options.  An IRA will allow your non-spouse beneficiary to “stretch” an Inherited IRA over their lifetime, while most employer plans do not allow this. This is a particularly important factor when it comes to tax implications for your heirs. In our experience, we’ve also found that it’s quicker and easier to transfer assets to beneficiaries from an IRA than from an employer-sponsored retirement plan.

On the other hand, you may just want to leave your money in a 401(k) for the following reasons:

  • You want earlier access to funds: Employer sponsored plans have provisions that allow you to withdraw penalty-free funds as early as age 55 if you retire early, whereas your IRA is subject to the IRS rules mandating a minimum withdrawal age of 59 ½. If you plan to retire early and need access to retirement funds, make sure you only do a partial rollover and leave assets available penalty-free.
  • You have limited access to investment advice:Employer-sponsored plans are designed for simplicity; you don’t have to be a savvy investor. As we discussed, an IRA opens up endless opportunities, but without adequate investment knowledge, you could unwittingly put your retirement assets at risk.
  • It can be a hassle:Plan administrators don’t openly advertise in-service rollover options. They can involve some paperwork and a few phone calls. At Relevé, we can assist by handling much of the process and paperwork for you.

As with anything, the important thing to consider here is the cost-benefit of your decision. Feel free to reach out to Relevé if you’d like to discuss the possibility of an in-service rollover. We can help determine if your plan offers this benefit and any pros and cons in your specific situation.

And before you begin taking distributions from any retirement plan, check in with an advisor to help with the details. Mistakes can be expensive.

This is the second in our series of posts answering your questions about employer retirement plans. Stay tuned for more information on this topic!

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