Let’s talk about: In-Service Distribution Opportunities…
If you are like most people who participate in an employer-sponsored retirement plan, you will be pleasantly surprised to learn that you may be permitted to access part or all of your assets within the plan while still employed.
It is one of the most unique and powerful investment strategies available, yet it’s seldom used or explained in offering greater diversification and opportunities. Some opportunities may even provide guaranteed benefits for lifetime income. There are typically two limitations on the amount that can be distributed:
a) Distributions can only be taken from certain types of employer contributions (e.g. vested employer match and earnings thereupon, and rollover amounts from previous employer plans); and
b) The monies withdrawn must have been in the plan for at least two years.
If you are over 59 ½ years of age, salary deferrals may also be available for in-service withdrawals. This transaction will be a direct rollover request of your eligible rollover distribution balance to a traditional IRA (an Individual Retirement Account or Individual Retirement Annuity) that will accept the rollover.
The plan’s summary plan description (SPD) will specify what types of assets may be eligible for a direct rollover distribution. An in-service distribution could have several advantages to help meet your individual needs including:
- Broader array of investment choices
- Consistent, personal service
- More control over assets
- An option you can use to develop and grow your guaranteed retirement income plan while you continue as a plan participant
The plans that permit in-service distributions of employer contribution, but not employee contributions can be done as a direct rollover request for any balance up to the eligible rollover amount into an IRA, before your attained age of 59 ½.
Here is a case study example of an in-service distribution in action.
Case Study: John, 56-years-old, 401(k) Plan Participant:
John is approaching retirement and he is concerned about his retirement assets. He has a 401(k) with his employer. John’s 401(k) balance is $700,000 and consists of $100,000 in rollover contributions, $200,000 in matching contributions, and $400,000 in salary deferrals.
After a thorough review of his situation and eligibility, John determines that he can immediately access the $100,000 rollover amount in this 401(k) plan. While the plan does not allow for in-service distributions of salary deferrals until he reaches age 59 ½, John may also access the $200,000 in employer contributions as part of his in-service distribution.
The next step is for you and a retirement specialist to consider your options and list the possible advantages and disadvantages of each. Once you determine this may be appropriate for your situation, it could make a significant difference in the quality of your retirement. It is critical that you work with financial and tax professionals to identify and look at your personal implications so you can make an educated decision. One option that has been less explored, only because most financial administrators have not made it readily available through their retirement guidance services, is that you can do a direct rollover with payment directly to your IRA. Using this method the plan is not required to withhold 20% of the payment for federal income tax. The amount rolled over will maintain its tax deferral and become subject to the tax rules that apply to the IRA. Some of my clients have set up an individual retirement annuity, IRAs and other qualified plans already providing tax deferral like that provided by an annuity. It is the additional features and benefits, such as contract guarantees and the ability to receive lifetime income, which are contained within the annuity and are the sought after features for the foundational guaranteed income part of their retirement planning.
In determining whether an in-service distribution is appropriate for you, meet with your financial professional! Examine the governing plan documents. The taxpayer should seek advice from an independent tax advisor. This material is intended to provide information on the subjects covered. It is general in nature and the strategies suggested may not be suitable for everyone. It is not intended to provide specific tax, legal or other professional advice. You should seek advice from your tax and legal advisors regarding your individual situation.
For further information or a free consultation, contact me:
Wm. Jed Mayfield, President
Mayfield Financial & Estate Protection Services, Inc.
Phone # 520-322-9773