Dreaming of retiring early? Did you know that 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 to do this type of rollover and the associated pros and cons.
To start, here are 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and if you take one before the age of 59½, a 10% federal income tax penalty commonly applies.1 In addition, 20% of the withdrawn amount is withheld for tax purposes.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 73, you must begin taking the required minimum distributions.
Now, the fine print.
You may be able to take a distribution from your qualifying, employer-sponsored plan while still working via an in-service non-hardship withdrawal.2 This is done by arranging a direct rollover into an individual retirement account (IRA), and you may 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 allowed by your employer. Many Houston area employers do allow for this, check with Human Resources to see if your employer offers this benefit.
Generally, distributions from traditional IRAs must begin once you reach the age of 73. The money distributed to you is taxed as ordinary income. When such distributions are taken before the age of 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 simply prohibit them, while others allow them under certain conditions. Check with your plan administrator to see if in-service non-hardship withdrawals are available to you, and speak to your financial professional before making any changes.3
Weigh the pros and cons.
Will your assets perform better in an IRA or in your company’s retirement plan? As with any investment strategy, it is challenging to predict the outcome. Right now, you can put up to $7,000 into an IRA annually if you are 50 or older.4 If your employer matches your contributions, getting out of the plan may mean losing future matches.
To help determine your retirement readiness, take our Checklist Challenge.
The financial advisors at Outlook Wealth Advisors, have assisted retirees and pre-retirees prepare to Retire Abundantly for over 25 years. Email us at [email protected] or call 281-872-1515 to get started.