Get a jump on rolling workplace dollars into an IRA

Published 12:03 am Sunday, April 13, 2014

Does the money you are accumulating in your employer-sponsored retirement plan have to stay there until you leave your job or retire? You may be surprised to find that in some cases, the answer is no.

You might already have the opportunity to roll money from your 401(k) or 403(b) retirement plan to an IRA even though you are still employed with the company.

These “early rollovers” are known as in-service distributions. The term refers to the ability to roll money out of your workplace plan while you are still working (in service) for the employer.

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The option is not available to everyone. Your employer-sponsored plan must include provisions that allow for in-service distributions. If the plan does allow it, participation may be restricted to those who are 59-1/2 or older. Check with your plan administrator or review the summary plan document for your specific situation.

Take more ownership of your retirement savings

If you have the opportunity to pursue an in-service distribution, some of the benefits include:

4 Control — The money in your workplace retirement plan belongs to you, but you may feel like you have limited control over it. The rules that control everything from available investment options to distributions are regulated by the plan.

4 Choice — Some workplace retirement plans offer a limited number of investment options. By contrast, an IRA typically includes a broader choice of investments, which may help you diversify your portfolio.

4 Flexibility — IRAs generally make it easier to split assets among different beneficiaries. You can establish separate IRA accounts, naming a different beneficiary for each. That is not possible with a workplace retirement plan. Money in an IRA can also be directed to a trust, giving you more control over how assets are distributed after you’re gone.

When it makes sense to keep money in your workplace plan

An in-service distribution isn’t the best choice for everyone. There are some instances where it’s best to keep your money in an employer-sponsored retirement plan:

4 High percentage of employer stock. If some of your 401(k) money is invested in company stock, it may make sense to keep those dollars in the employer-sponsored plan. In some cases, people have been able to take advantage of tax-saving provisions with that stock when it comes time to move money from the plan and ultimately sell the stock. These provisions are not available if the stock is rolled to an IRA.

4 Creditor protection. In addition, employer-sponsored qualified plan assets are protected from creditors under federal law. When assets are rolled from a qualified plan to an IRA, they retain federal protection in the event of bankruptcy. However, other protection from creditors is determined by state laws.

4 Retirement age. With qualified plans, participants who stop working in the year they turn age 55 or older can make withdrawals without the 10 percent IRS premature distribution penalty. With an IRA, you generally may not make withdrawals without penalty until age 59 1/2 (certain other exceptions apply). For this reason, if you plan to retire early, you may want to preserve penalty-free access by leaving your retirement funds in your 401(k).

4 After-tax money. If you move after-tax money into an IRA, that money will not be separately accessible. So before you proceed with an in-service distribution into an IRA, be sure that you understand whether after-tax money will be included and how rolling over this money may affect you. An alternate strategy may be to convert your after-tax contributions to a Roth IRA. Conversions of after-tax money to a Roth IRA are non-taxable (only conversions of the related earnings are taxable) and qualified distributions of earnings are tax free.

4 Costs. Make sure you consider the investment costs, as 401(k) plans may include lower cost institutionally priced investments. Also, keep in mind that an IRA may have investment options with features you won’t find in a 401(k) plan at any cost.

Handle with care

One key to an in-service distribution is to make sure the rollover is executed in accordance with the rules. Just like any rollover of retirement plan dollars, the money must be moved directly from the workplace plan to the custodian of your IRA. If the money is first sent to you instead, an automatic 20 percent tax withholding applies and there is a risk that the distribution will be subject to additional taxes and a penalty.

If money is transferred directly between the plan and the IRA custodian, the tax-deferred status of the dollars accumulated in your retirement plan stays in tact and will continue within the IRA.

Also, it’s important to note that some employer plans may temporarily prevent new contributions by participants who take an in-service distribution that exceeds a specified amount. Be sure to thoroughly discuss the implications of any withdrawals with the plan administrator.

It’s important to make sure the money is invested in a way that is consistent with your long-term goals and risk tolerance level. Keep in mind that your retirement savings represent your future financial security. This money needs to be managed effectively and protected from unnecessary risks. There can be complexities involved in choosing an in-service distribution. Discuss your IRA options and tax considerations with your financial and tax advisors.


Forrest A. Johnson III is a financial advisor with Ameriprise Financial Services, Inc. in Natchez. He can be reached at 601-442-6292 or 319 Main St. Natchez.