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If your employer's 401(k) investment options suck or if its plain costly and eats up your retirement returns while feathering the bed of the plan's broker, move your money where you can control your investment options and charges.
Let's say you now age 60, don't plan to retire from your job until 2014, and your 401(k) plan is way costly and has less than stellar investment options. You can roll your $1 million (or less - don't all of us wish our 401(k)'s were worth at least $1 million?) 401(k), in to an individual retirement account (IRA), using a little-known maneuver: an "in-service" distribution.
Employers and 401(k) plan administrators don't promote this fact (it is not in the financial best interest of brokers and some administrators), but most workers 59 as well as a half and older, and some more youthful ones, can roll over 401(k) money while they are still working and contributing to the plan. This option is not appropriate for everyone. But in most cases it can provide better investment choices, a better beneficiary choice options or even a chance (new in 2008) to transfer 401(k) dollars directly in to a Roth IRA.
The law allows workers to empty their 401(k) accounts once they hit 59 1/2 without the Federal 10% penalty and the State penalty. They can roll all the money directly in to an IRA without paying tax now. Or they can take money out, pay any ordinary income taxes due and spend what is left (usually not a lovely suggestion). The same goes for plan participants in government and not-for-profit savings designs similar to 401(k)s.
The law permits these inservice withdrawals, but employers' designs don't must permit it. Still, 70% of companies--and 89% of those with 5,000 or more employees--allow these inservice withdrawals, the Profit Sharing/401k Council of The united states present in a 2006 survey of 1,000 firms. So do some public sector employers; the federal government, for example, allows older workers to withdraw money, but only once.
As for pre-59 as well as a half year elderly folks, the law lets them get inservice distributions of money rolled over from earlier 401(k)s; of employer (but not worker) pretax contributions; of worker after-tax contributions; and of account earnings. Here companies are less accommodating--only 16% permit this option, the 2006 survey found. Note that if a more youthful worker spends the money, in lieu of rolling it over, he'll owe an additional 10% Federal penalty and any State penalty (2.5% in New york for example) on the taxable amount, as they would if they got a "hardship" distribution from his 401(k) or took a loan from his 401(k) and switched jobs without repaying the loan.
One obvious reason to think about an inservice rollover is to escape a bum plan that has costly or mediocre money. Some tiny designs have annual fees on domestic equity mutual money that top 2% a year. Outrageous. If you are stuck in one of those, you can chop your costs by rolling your 401(k) money in to an IRA at a no-load fund company such as Vanguard, Fidelity or T. Rowe Cost, or in the event you work with an Advisor, pick one who works with Dimensional Money (DFA). They have some significant structural advantages to the other low cost money.
Another strategy: roll over part of your money. In the event you have some lovely choices in your 401(k) but not , roll over part of your money to an IRA so you could invest in better quality money like those from Dimensional Fund Advisors, including small-capitalization and value money if there's no comparable offerings in your company plan (which there probably are not). It is a lovely bet that with better structured DFA money and professional asset allocation and other advice, you'll come out ahead.
Not surprisingly, outside financial planners and Investment Advisors push rollovers, since they can often do a better job and, not surprisingly, it gives them more money to manage and collect fees for. In other words, it is a legitimate growth opportunity for Fee-Only Financial Planners and Investment Advisors. Fifty-year-olds, as they near retirement and their 401(k) balances grow, require and are willing to pay for professional help. You can discover a Fee-Only Advisor in your area at the National Association of Personal Financial Advisors (NAPFA).
There's a few other reasons to look at an inservice IRA Rollover. One is a brand spanking new provision, that lets you roll 401(k) money directly in to a Roth IRA, where future earnings will be tax free. If your plan administrator is prepared to make a separate distribution with your after-tax contributions, it appears (although the Internal Revenue Service has not issued final rules on this) that you can roll that money directly in to a Roth IRA and pay no taxes on the conversion. For now Roth rollovers are allowed only for those with relatives incomes of $100,000 or less. That household income restriction is due to finish in 2010.
Another reason to do an inservice rollover comes up when coordinating estate planning with retirement planning, if you are leaving retirement money to somebody other than your partner, like your children or grandkids. A partner who inherits either a 401(k) or an IRA can roll it in to his or her own IRA with all the same flexibility that an IRA offers its original owner. Children, grandkids or other non-spousal heirs who inherit an IRA cannot roll it over in to their own IRA, but they can keep the money in an "inherited" IRA, potentially stretching out withdrawals and tax deferral for lots of years based on their life expectancy. Under a 2006 law modify, kids and other "non-spousal" heirs can roll 401(k)s in to inherited IRAs--but only if the employer permits it, which not all do. If your employer doesn't permit it, it might be a lovely topic for discussion together with your HR Department. If your employer is reluctant to cooperate, get the money out now and put it in to an IRA that won't have any employer getting in the way of your estate planning. (A non-spousal heir cannot convert an inherited IRA to a Roth IRA.)
Before you jump to an IRA Rollover, think about some of the advantages to a 401(k). In a lovely plan the fees, for index money and passive asset class money like DFA, may be low. In the event you retire early, you can make penalty-free withdrawals from a 401(k) at age 55; with an IRA, you usually must wait until you are 59 as well as a half unless you commit to a 72(t) withdrawal plan (periodic payments for 5 years or age 59 1/2 whichever comes later). In the event you are in a hard spot, you can take a loan (of up to $50,000) from your 401(k) but not your IRA.
And, in the event you hold your employer's stock in your 401(k), you may be eligible for a tax break at retirement (a NUA or Net Unrealized Appreciation strategy). In the event you transfer that stock to a taxable account, you'll pay ordinary income tax (at rates of up to 35%) only on what the stock was worth at the time it was put in to your 401(k). Any further appreciation won't be taxed until you sell the stock and then only at the long-term capital gains rate--which now tops out at 15%. There's some crazy rules here that decide whether you are eligible for this break. So if you have got your employer's stock in your 401(k), check together with your plan administrator and your tax adviser. This might be a case for doing a partial inservice withdrawal leaving the company stock behind until retirement time.
By: Rashid
Let's say you now age 60, don't plan to retire from your job until 2014, and your 401(k) plan is way costly and has less than stellar investment options. You can roll your $1 million (or less - don't all of us wish our 401(k)'s were worth at least $1 million?) 401(k), in to an individual retirement account (IRA), using a little-known maneuver: an "in-service" distribution.
Employers and 401(k) plan administrators don't promote this fact (it is not in the financial best interest of brokers and some administrators), but most workers 59 as well as a half and older, and some more youthful ones, can roll over 401(k) money while they are still working and contributing to the plan. This option is not appropriate for everyone. But in most cases it can provide better investment choices, a better beneficiary choice options or even a chance (new in 2008) to transfer 401(k) dollars directly in to a Roth IRA.
The law allows workers to empty their 401(k) accounts once they hit 59 1/2 without the Federal 10% penalty and the State penalty. They can roll all the money directly in to an IRA without paying tax now. Or they can take money out, pay any ordinary income taxes due and spend what is left (usually not a lovely suggestion). The same goes for plan participants in government and not-for-profit savings designs similar to 401(k)s.
The law permits these inservice withdrawals, but employers' designs don't must permit it. Still, 70% of companies--and 89% of those with 5,000 or more employees--allow these inservice withdrawals, the Profit Sharing/401k Council of The united states present in a 2006 survey of 1,000 firms. So do some public sector employers; the federal government, for example, allows older workers to withdraw money, but only once.
As for pre-59 as well as a half year elderly folks, the law lets them get inservice distributions of money rolled over from earlier 401(k)s; of employer (but not worker) pretax contributions; of worker after-tax contributions; and of account earnings. Here companies are less accommodating--only 16% permit this option, the 2006 survey found. Note that if a more youthful worker spends the money, in lieu of rolling it over, he'll owe an additional 10% Federal penalty and any State penalty (2.5% in New york for example) on the taxable amount, as they would if they got a "hardship" distribution from his 401(k) or took a loan from his 401(k) and switched jobs without repaying the loan.
One obvious reason to think about an inservice rollover is to escape a bum plan that has costly or mediocre money. Some tiny designs have annual fees on domestic equity mutual money that top 2% a year. Outrageous. If you are stuck in one of those, you can chop your costs by rolling your 401(k) money in to an IRA at a no-load fund company such as Vanguard, Fidelity or T. Rowe Cost, or in the event you work with an Advisor, pick one who works with Dimensional Money (DFA). They have some significant structural advantages to the other low cost money.
Another strategy: roll over part of your money. In the event you have some lovely choices in your 401(k) but not , roll over part of your money to an IRA so you could invest in better quality money like those from Dimensional Fund Advisors, including small-capitalization and value money if there's no comparable offerings in your company plan (which there probably are not). It is a lovely bet that with better structured DFA money and professional asset allocation and other advice, you'll come out ahead.
Not surprisingly, outside financial planners and Investment Advisors push rollovers, since they can often do a better job and, not surprisingly, it gives them more money to manage and collect fees for. In other words, it is a legitimate growth opportunity for Fee-Only Financial Planners and Investment Advisors. Fifty-year-olds, as they near retirement and their 401(k) balances grow, require and are willing to pay for professional help. You can discover a Fee-Only Advisor in your area at the National Association of Personal Financial Advisors (NAPFA).
There's a few other reasons to look at an inservice IRA Rollover. One is a brand spanking new provision, that lets you roll 401(k) money directly in to a Roth IRA, where future earnings will be tax free. If your plan administrator is prepared to make a separate distribution with your after-tax contributions, it appears (although the Internal Revenue Service has not issued final rules on this) that you can roll that money directly in to a Roth IRA and pay no taxes on the conversion. For now Roth rollovers are allowed only for those with relatives incomes of $100,000 or less. That household income restriction is due to finish in 2010.
Another reason to do an inservice rollover comes up when coordinating estate planning with retirement planning, if you are leaving retirement money to somebody other than your partner, like your children or grandkids. A partner who inherits either a 401(k) or an IRA can roll it in to his or her own IRA with all the same flexibility that an IRA offers its original owner. Children, grandkids or other non-spousal heirs who inherit an IRA cannot roll it over in to their own IRA, but they can keep the money in an "inherited" IRA, potentially stretching out withdrawals and tax deferral for lots of years based on their life expectancy. Under a 2006 law modify, kids and other "non-spousal" heirs can roll 401(k)s in to inherited IRAs--but only if the employer permits it, which not all do. If your employer doesn't permit it, it might be a lovely topic for discussion together with your HR Department. If your employer is reluctant to cooperate, get the money out now and put it in to an IRA that won't have any employer getting in the way of your estate planning. (A non-spousal heir cannot convert an inherited IRA to a Roth IRA.)
Before you jump to an IRA Rollover, think about some of the advantages to a 401(k). In a lovely plan the fees, for index money and passive asset class money like DFA, may be low. In the event you retire early, you can make penalty-free withdrawals from a 401(k) at age 55; with an IRA, you usually must wait until you are 59 as well as a half unless you commit to a 72(t) withdrawal plan (periodic payments for 5 years or age 59 1/2 whichever comes later). In the event you are in a hard spot, you can take a loan (of up to $50,000) from your 401(k) but not your IRA.
And, in the event you hold your employer's stock in your 401(k), you may be eligible for a tax break at retirement (a NUA or Net Unrealized Appreciation strategy). In the event you transfer that stock to a taxable account, you'll pay ordinary income tax (at rates of up to 35%) only on what the stock was worth at the time it was put in to your 401(k). Any further appreciation won't be taxed until you sell the stock and then only at the long-term capital gains rate--which now tops out at 15%. There's some crazy rules here that decide whether you are eligible for this break. So if you have got your employer's stock in your 401(k), check together with your plan administrator and your tax adviser. This might be a case for doing a partial inservice withdrawal leaving the company stock behind until retirement time.
By: Rashid
