By Brad Pistole, CFF®
When it comes to retirement planning and tax-deferred accounts, such as 401(k)s, 403(b)s, and TSPs, the list of terms and rules for making contributions and for taking withdrawals can seem endless and overwhelming. This is especially true when you have a full-time career, are raising a family, and simply do not have the time or energy to keep up with the constant changes that are always taking place. That is why most people hire a professional who specializes in these rules and regulations to help keep them moving in the right direction, so they will be prepared for retirement when that day comes.
I’ve been the host of a retirement planning radio show since 2010 and over the past decade, I’ve talked to thousands of people who were planning for their future retirement. Think about this for a minute, there are currently more than 10,000 people turning age 65 every single day in this country. That is more than 10,000 people every day who are entering the world of retirement and Medicare. That is a lot of people who have a lot of retirement planning questions.
I often get asked, “What is the number one thing people ask you when they call in to your radio show?” Most of the people who call in to my show are trying to learn how to keep their money protected from the violent swings in the market, because they have reached an age in which they can no longer afford to go through a major bear market. They simply do not have the time to recover from losses and fees, like they did when they were younger. This is especially true if they are already taking distributions from their accounts. Losses + Fees + Distributions = the formula for what I call the TRIPLE WHAMMY! This should be avoided at all cost in retirement. Just ask anyone who retired in 2001 or in 2008 and they will tell you firsthand what this will do to a retirement plan.
When retirees call into my show, they ask questions about all kinds of topics like how to avoid 10% penalties on distributions, Roth conversions, RMDs, QCDs, tax planning, estate planning, and how to make their money last the rest of their lives. But of all the things I get asked, I can tell you this, the #1 retirement planning strategy that is often missed, because they simply do not know it is available to them is something called the “age 59 ½ in-service withdrawal.” This is something I have been writing about and talking about for years, yet every single week I come across people who have never even heard of it. It is something most employees who have an active company retirement plan with their current employer can take advantage of once they turn 59 ½. This does have to be specified in the company plan document, but it has been my experience that this is available to most employees about 95% of the time.
So just exactly what is an in-service withdrawal? An in-service withdrawal is a qualified distribution you are allowed to take from your company plan, while still employed by that company. It will allow you to do a direct transfer or rollover of up to 100% of your vested funds to the account and custodian of your choice. And yes, even though you still work for your company and have an active retirement plan, such as a 401(k) or 403(b), you can move any vested funds out of those accounts to a new account, one you and your advisor feel will best meet your current and future retirement planning needs.
This transfer/rollover does not close your current account, even if you move 100% of the funds from it, making your current balance zero. Your company plan will remain open. You can continue your payroll deposits into that account with your next paycheck, and you will continue to receive any company matching funds that are available to you.
This can be a very powerful planning strategy for your future retirement. Why? Here are a few of the main reasons an age 59 ½ in-service withdrawal might benefit you at this stage in your retirement planning.
1) Once you reach age 59 ½, your risk level should be decreasing. Especially if you plan to retire in the next few years. The in-service withdrawal will allow you to move any amount of money, up to 100%, from your current company plan to an account that is custom-fit for your specific situation. Any amount of money you move, via the in-service withdrawal can be structured to protect you from market risk and market volatility. The funds that remain in the company plan and all future payroll deposits, including the company match, can still participate in the market. Having more than one account can help you create a good mixture of potential growth and safety, giving you a more balanced portfolio.
2) This qualified distribution/rollover is not taxable when done correctly. There is no mandatory 20% withholding nor is there a 10% penalty on the distribution, like there is prior to age 59 ½. The funds will be moved to qualified, tax-deferred account and there is no taxable income reported to the IRS.
3) Company plans often have limited investment options. A rollover can offer you several things that are not available inside your company plan such as an increased number of investment options offered by the new custodian, fixed income options that protect you from market fluctuation, guaranteed income options that come with certain types of annuities which are offered by various insurance companies, moving funds from a company plan to an IRA (individual retirement account). IRA’s have benefits and features that company plans do not offer. And vice versa. (Always ask a qualified advisor if an IRA would be a better fit for you in your specific situation.)
4) Income now, if needed. Distributions from a company plan have a mandatory 20% tax withholding. Rolling over funds to an IRA will avoid this 20% withholding. Any funds that are moved into an IRA can immediately be used for income and there is no 10% penalty or forced tax withholding. You can decide to withhold taxes from the distribution from the IRA or not.
5) Future income planning. Moving funds to an IRA can allow you to secure a guaranteed source of future income. When structured correctly, your new account can avoid 100% of the volatility that often comes with the investment options inside your company plan and you can secure a contractual, guaranteed rate of return that can be used for single or joint lifetime income in the future. This will protect you and your spouse from ever having to worry about running out of money in retirement. The paycheck from your rollover account can be structured to last the rest of BOTH of your lives, no matter how long you live.
6) RMD planning. Tax-deferred accounts have various rules for when your required minimum distributions begin. Having retirement money in both a company plan and an IRA can offer you multiple options for dealing with Uncle Sam and the tax-infested distributions he will require from you in the future.
When I talk to people who are planning for their future retirement, and I share something with them they have never heard before, they will often say, “Sometimes you just don’t know what you just don’t know. I wish I would have heard about this many years ago.” Like many other things you learn about in life, the age 59 ½ in-service withdrawal might be one of those things you wish you had heard about long before now. However, what matters most is taking advantage of it once you are aware it exists.
If you are not sure whether or not an in-service withdrawal is offered by your company, reach out to a qualified advisor and talk to your HR department. Hopefully, this will put a new arrow in your quiver and give you another weapon that will help you take aim at the best retirement possible for you and your family.
About the author: Brad Pistole, CFF®, CAS®
Brad Pistole, a Certified Financial Fiduciary® and Certified Annuity Specialist®, is the president and CEO of Trinity Insurance and Financial Services in Ozark, Mo., the host of Safe Money Radio which airs on several stations each week in Missouri, Arkansas, Kansas, and Oklahoma, and the author of Safe Money Matters. Brad is also a member of Ed Slott's Master Elite Advisor Group and the National Ethics Association. He is a Million Dollar Round Table Top of the Table Advisor.