The Pros and Cons of Early Retirement Plan Rollovers

Did you know you may be able to take your 401(k), 403(b), or 457 plan and roll it into another type of retirement account while you are still working? Let’s look at how these rollovers can happen and the pros and cons of making them.

To start, some basics. Distributions from 401(k) plans and most other employer-sponsored retirement plans are taxed as ordinary income, and if you take one before age 59½, a 10% federal income tax penalty commonly applies.¹ In addition, 20% of the withdrawn amount is withheld for tax purposes. Generally, once you reach age 72, you must begin taking the required minimum distributions.

Now, the fine print. You may be able to take an "early" distribution from your qualifying, employer-sponsored retirement plan while still working via an in-service non-hardship withdrawal.² This is done by arranging a direct rollover of these assets into an individual retirement account (IRA) to potentially avoid both the 10% penalty and the 20% tax withholding in the process. It’s important to note that this option is only available if your employer's plan allows it.

It may be wise to speak to your financial professional before making any changes. [I'd be happy to chat if you're interested]

Generally, distributions from traditional IRAs must begin once you reach age 72. The money distributed to you is taxed as ordinary income. When such distributions are taken before age 59½, they may be subject to a 10% federal income tax penalty.

The criteria for making in-service non-hardship withdrawals can vary. Some workplace retirement plans prohibit them. Others permit them when you’ve been on the job for at least five years, when assets in your plan have accumulated for at least two years, or you are 100% vested in your account.²

Weigh the pros and cons. Who knows if your reinvested assets will perform better in an IRA than they did in your company’s retirement plan? Only time will tell. Right now, you can put up to $7,000 into an IRA annually if you are 50 or older.³ If your employer matches your retirement plan contributions, getting out of the plan may mean losing future matches. However, I regularly review retirement plans that have expensive and underperforming funds. In those circumstances, you may often be better served by moving assets into an IRA and having more control over those factors. A decision like this should be viewed through the lens of a comprehensive financial plan to determine the overall benefits this could provide.

This content is developed from sources believed to be providing accurate information and provided by Twenty Over Ten & Verity Wealth Partners. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.