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Jim Lentini: Tips for your 401(k)

Posted: March 22, 2010 10:51 p.m.
Updated: March 23, 2010 4:55 a.m.
 
Many workers today are trying to rebuild their 401(k) plans that were hit by the financial crisis that surfaced in 2008. If they are in retirement or will be within five years, it will be difficult considering the volatility of our markets and uncertainty created by the economy and deficit spending of our government, both at the state and federal level.

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) 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 1/2, separation from service or plan termination.

However, the plan document may allow for a non-hardship distribution even if no triggering event has occurred.

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. First, only certain employer contributions can be distributed and second, the monies must have been in the plan for at least two years.

If you are older than 59 1/2, your own salary deferrals may also be available for an in-service distribution. Again, the plan administrator should be consulted regarding any limitations that a particular qualified plan may impose on in-service non-hardship distributions.

Rollover options
Once you have determined if you can roll over any distribution, you would be able to select a portfolio of your choosing, including a variable annuity that could offer you a guarantee of principal, guarantee growth and income options not available in your existing plan.

This could give you peace of mind and comfort knowing that you will not lose anymore principal due to market conditions for your future retirement income. This is the only guarantee that I'm aware of, other than "death and taxes."

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.

As always, consult with your financial advisor when considering any changes, withdrawals or distributions of your retirement plan. It is either "you at work, or your money at work."

Jim Lentini, CLU, ChFC, IAR, is president of Lentini Insurance & Investments, Inc. His column reflects his own views and not necessarily those of The Signal.

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