If you are considering withdrawing from your 401(k) while still employed there are a few things you need to know. Many people believe that you can only complete a rollover when you switch jobs, but an in-service rollover allows you to move your 401(k) funds into an IRA without changing employers.
Withdrawing money from your 401(k) while you are still employed may allow you to begin implementing your retirement income strategy sooner, get access to a range of investments and decrease the amount of fees you pay. Or it might provide you with access to part of your retirement assets so that you can manage them as desired.
Rolling Over Your 401(k) into an IRA Account
Many providers - though not all - offer in-service distributions. Conditions may vary but in general, if you are younger than 59½ the money rolled over must come from employer contributions (either matched money or profit-sharing accumulations), it cannot be from pre-tax contributions. There will also be an early withdrawal tax penalty. However, after age 59½, there are minimal restrictions in moving all of the funds over to an IRA. In a previous article, we explored the tax implications of in-service withdrawals from a 401(k) to an IRA in detail.
Some questions to ask your plan provider are:
- Can I withdraw money from my plan while still employed?
- What are the conditions of in-service withdrawals?
- What types of accounts can I move this money into?
- What are the tax implications?
Advantages of an in-service rollover
An in-service rollover offers the same benefits as a conventional rollover. By transferring money from your 401(k) into an IRA, you have more control over your investments as 401(k) plans usually offer limited investment opportunities. IRAs on the other hand give investors many options when it comes to purchasing mutual funds and exchange-traded funds, single stocks and bonds, real estate investment trusts and other securities. Additionally, the fees associated with an IRA are frequently lower than those of a 401(k). If you're looking for more investment choices or lower fees, this may be the right option for you.
Disadvantages of an in-service rollover
An in-service rollover has the same disadvantages as a regular rollover. IRAs for example usually have fewer legal protections than 401(k)s, and you cannot borrow from your IRA like you can from a 401(k). An in-service withdrawal or rollover can also interrupt your 401(k) contributions from your pay check. Some providers may not allow you to make tax-deferred deposits into your 401(k) for a set period following an in-service rollover. It is also worth considering that an IRA generally has different withdrawal rules than a 401(k), so once you've rolled over, you might not be able to access the money for quite some time.
In-Service Withdrawal vs. 401(k) Loan
You may be wondering if it's better to take out a loan from your 401(k) or make a withdrawal. If you are not planning on reinvesting your money, then there are provisions for taking out a loan for some situations. It is important to be mindful of the terms and conditions. In general, your repayments are deducted from your pay check, if however you leave your job then the loan must be paid back when you file your taxes in that tax year. Additionally, what you need to pay back isn't just what you borrow but the interest on the loan as well.
The substantial difference between taking a loan out from your 401(k) and an in-service withdrawal:
- With a loan, you must pay the money back and you are paying interest - so you will likely end up with less in your retirement savings.
- With an in-service withdrawal, you can reinvest your money with the intention of increasing your retirement savings.
With either an in-service withdrawal or a loan you may still be able to contribute to your 401(k) though as mentioned above some plans have limits. If you are able to make deposits it may be worth considering. Doing so can help you in two ways:
- You will still get any employer matching that might be offered by your workplace.
- You will continue building up your savings.
If you are considering withdrawing from your 401(k) while still employed, it is important to research your current plan and the options available. If you know you will need more money during retirement, or if you're not content with the investment choices in your 401(k), redirecting some of your funds into another investment account might be of benefit to you. Check with your employer that non-hardship, in-service withdrawals from your plan are allowed, and speak to a fee-only financial advisor to ensure it falls in line with your greater money strategy.