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Consider In-Service Distribution to an IRA

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Posted: February 22, 2008 7:30 p.m.
Updated: April 24, 2008 5:02 a.m.
 
If you are a participant in a company sponsored 401(k) plan, there may be some benefit for you to consider an in-service distribution to an IRA. While it is important to save as much as possible for your retirement, it is also important to make your retirement dollars work as hard as possible; so an in-service withdrawal might make sense for you.

Employees may roll over their retirement plan accounts to an IRA when they retire or quit. However, many people do not realize that certain retirement plans assets can be rolled over to an IRA even while they are still "in-service." Many retirement plans offer the opportunity for in-service withdrawals.

Why consider an in-service withdrawal?
While all qualified retirement plans offer tax-deferral, IRAs offer compelling tax advantages over 401(k)s and other retirement plans. You may want to consider an in-service withdrawal to an IRA if:

* You need the assistance of a financial adviser. Most retirement plans don't offer participants personal advice based upon them as individuals. By moving your assets into an IRA, you could work with a financial professional of your choice on a customized solution for your overall retirement plans and goals.

* You are unhappy with the range of investment options. Some plans offer too few investment choices, others offer far too many. You might prefer fund options not offered through your company plan. Or, you want to consider a plan that offers guarantee options not offered in company sponsored plans. Guarantees are important anytime in retirement planning, but especially in times of volatility, like now!

* You want to be able to stretch your distributions. Most retirement plans like 401(k)s require a lump sum distribution upon the death of the participant. That means beneficiaries have to receive the money and pay taxes on it almost immediately. If those assets were in a IRA instead, your heirs would be able to stretch their receipt of money over a much longer time, thereby maximizing the tax deferral, and minimizing the income taxes owed. Also, working with a professional adviser will offer more tax advantage options for your consideration.

* You are planning a home purchase and might need money. IRAs offer greater flexibility for home purchase. A distribution from an IRA used for the down payment of a home would not have the 10 percent penalty assessed in a 401(k), if you are over 59. This also applies to withdrawing funds from an IRA for college education.

* You have doubts about the financial health or longevity of your company. While not common, there have been well publicized instances of corporate plans being frozen or lacking funds in their accounts (remember Enron?).

* IRAs may offer significant benefits like greater flexibility and control, but they don't offer the following 401(k) options:
1. You cannot borrow from an IRA, unlike a 401(k), which offers loan options.
2. Creditor protection is stronger on ERISA-protected plans like a 401(k). IRAs offer some creditor protection but it is based on state law and frequently requires you to file for bankruptcy.
3. Required Minimum Distributions don't start in a 401(k) plan until you stop working. In an IRA, they must begin at age 70 1/2.

The IRS requires employers to give each employee a copy of the retirement plan's Summary Plan Description. If you don't have one, ask your human resources department for a copy and review it with your financial adviser. Your adviser should have experience with in-service withdrawals and can offer you guidance as to whether or not this strategy would be beneficial for you. If you decide an in-service withdrawal would be right for you, your adviser can also help you complete the paperwork and set up the accounts properly for your retirement goals.

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


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