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Jim Lentini: Consider an in-service withdrawal

Posted: July 6, 2009 4:12 p.m.
Updated: July 7, 2009 4:55 a.m.
 
Considering the decreased value declines most participants have experienced in their 401(k) and other pension plans in 2008 and 2009, many advisors are recommending to clients to consider an in-service withdrawal.

A rollover to an IRA may offer a more diversified portfolio and options to protect your principal from volatility.

The general rule is that you cannot take a distribution from your pension plan until a triggering event occurs such as termination of employment or retirement.

However, if the 401(k) plan document permits, you may be able to take a distribution of certain employer contributions even while you are still working. (Note: The qualified retirement plan document may also permit in-service distributions in the event of financial hardship).

A triggering event
Generally, distributions from a qualified retirement plan are only permitted upon a "triggering event" such as death, disability, attainment of age 59, separation from service, or plan termination.

However, the plan document may allow for a non-hardship distribution even if no triggering event has occurred. Some plans also allow an in-service withdrawal if you have attained age 55, and are still actively at work.

Non-hardship distributions
Normally, only profit-sharing plans or 401(k) plans that are part of a profit-sharing plan or stock bonus plan permit non-hardship withdrawals.

You should consult the plan administrator to determine whether a particular qualified retirement plan permits in-service non-hardship distributions.

Limitations
If a plan permits in-service distributions, there are typically two limitations on the distribution: One, only certain employer contributions can be distributed, and two, the monies must have been in the plan for at least two years.

Again, the plan administrator should be consulted regarding any limitations that a particular qualified plan may impose on in-service non-hardship distributions.

Distribution tax
Remember, you will owe income tax on the in-service distribution, unless you roll the distribution proceeds to an IRA or other tax-qualified plan within 60 days of receiving the distribution.

Be sure to consult with your financial advisor before considering any changes, withdrawals, or distributions of your retirement plan.

Living benefit rider
A variable annuity with a living benefit rider has proven to be a valuable option for an in-service withdrawal.

It offers options not available in any other investment vehicle, such as principal protection, guaranteed growth of deferred income, guaranteed lifetime income for you and your spouse, and step-ups if the market outperforms your guarantee.

Depending on the variable annuity, the step-ups can be daily, quarterly, or annually. The step-ups give the owner peace of mind and confidence to stay fully invested during volatile times.

Considering our current issues affecting our economy and world issues, a Variable Annuity with a Living Benefit Rider should be considered for some portion of your retirement assets.

Remember, "It is either you at work, or your money at work."

Jim Lentini, CLU,ChFC,IAR is president of Lentini Insurance & Investments, Inc. He can be reached at (661) 254-7633. His column reflects his own views and not necessarily those of The Signal.

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