When it comes to retirement planning and tax-deferred accounts, such as 401(k)s, 403(b)s, and TSPs, the list of terms and rules for making contributions and for taking withdrawals can seem endless and overwhelming. This is especially true when you have a full-time career, are raising a family, and simply do not have the time or energy to keep up with the constant changes that are always taking place. That is why most people hire a professional who specializes in these rules and regulations to help keep them moving in the right direction, so they will be prepared for retirement when that day comes.
Think about this for a minute, there are currently more than 10,000 people turning age 65 every single day in this country. That is more than 10,000 people every day who are entering the world of retirement and Medicare. That is a lot of people who have a lot of retirement planning questions.
When people contact me, they ask questions about all kinds of topics like how to avoid 10% penalties on distributions, Roth conversions, RMDs, QCDs, tax planning, estate planning, and how to make their money last the rest of their lives. But of all the things I get asked, I can tell you this, the #1 retirement planning strategy that is often missed, because they simply do not know it is available to them is something called the “age 59 ½ in-service withdrawal.” This is something I have been writing about and talking about for years, yet every single week I come across people who have never even heard of it. It is something most employees who have an active employer retirement plan can take advantage of once they turn 59 ½. This does have to be specified in the employer plan document, but it has been my experience that this is available to most employees about 95% of the time.
So just exactly what is an in-service withdrawal? An in-service withdrawal is a qualified distribution you are allowed to take from your employer plan, while still employed with that employer. It will allow you to do a direct transfer or rollover of up to 100% of your vested funds to the account and custodian of your choice. And yes, even though you still work for your employer and have an active retirement plan, such as a 403(b), you can move any vested funds out of those accounts to a new account, one you and your advisor feel will best meet your current and future retirement planning needs.
This transfer/rollover does not close your current account, even if you move 100% of the funds from it, making your current balance zero. Your employer plan will remain open. You can continue your payroll deposits into that account with your next paycheck, and you will continue to receive any company matching funds that are available to you.
This can be a very powerful planning strategy for your future retirement. Why? Here are a few of the main reasons an age 59 ½ in-service withdrawal might benefit you at this stage in your retirement planning.
1) Once you reach age 59 ½, your risk level should be decreasing. Especially if you plan to retire in the next few years. The in-service withdrawal will allow you to move any amount of money, up to 100%, from your current company plan to an account that is custom-fit for your specific situation. The funds that remain in the employer plan and all future payroll deposits can still participate in the market. Having more than one account can help you create a good mixture of potential growth and safety, giving you a more balanced portfolio.
2) This qualified distribution/rollover is NOT taxable when done correctly. There is no mandatory 20% withholding nor is there a 10% penalty on the distribution, like there is prior to age 59 ½. The funds will be moved to qualified, tax-deferred account and there is no taxable income reported to the IRS.
3) Employer plans often have limited investment options. A rollover can offer you several things that are not available inside your employer plan such as an increased number of investment options offered by the new custodian and/or fixed income options that protect you from market fluctuation. IRA’s have benefits and features that employer plans do not offer. And vice versa. (Always ask a qualified advisor if an IRA would be a better fit for you in your specific situation.)
4) Income now, if needed. Distributions from an employer plan have a mandatory 20% tax withholding. Rolling over funds to an IRA will avoid this 20% withholding. Any funds that are moved into an IRA can immediately be used for income and there is no 10% penalty or forced tax withholding. You can decide to withhold taxes from the distribution from the IRA or not.
5) RMD planning. Tax-deferred accounts have various rules for when your required minimum distributions begin. Having retirement money in both a employer plan and an IRA can offer you multiple options for dealing with Uncle Sam and the tax-infested distributions he will require from you in the future.
When I talk to people who are planning for their future retirement, and I share something with them they have never heard before, they will often say, “Sometimes you just don’t know what you just don’t know. I wish I would have heard about this many years ago.” Like many other things you learn about in life, the age 59 ½ in-service withdrawal might be one of those things you wish you had heard about long before now. However, what matters most is taking advantage of it once you are aware it exists.
If you are not sure whether or not an in-service withdrawal is offered by your employer, reach out to a qualified advisor and talk to your HR department. Hopefully, this will put a new arrow in your quiver and give you another weapon that will help you take aim at the best retirement possible for you and your family.