401(k) plans usually offer employees the opportunity to set aside money for retirement, on a tax-favored basis, in a number of different investment options. A small portion of the first paycheck of a beginning employee may be invested indirectly in scores (or hundreds!) of different investments inside the plan options. Perhaps matching money from the employer is in the mix, too.
Some have likened this financial tool to a near-miracle.
But the same set of investment options that work well for the newer employee may become constricting to the long-term employee who has already saved hundreds of thousands of dollars, perhaps even $1 million or more.
As retirement approaches and account balances mount, there may be an option to gain more flexibility. Some plans permit people who are still actively employed to roll over a portion of their 401(k) balance, tax-free, to an IRA account of the employee’s choosing. These “in-service distributions” or “in-service rollovers” may or may not be permitted by a specific 401(k) plan—the provision is optional.
One large employer in Louisville restricts these rollovers to those over age 59½. Another does not permit them at all: money in the plan stays in the plan until retirement or termination. This is something to ask your employer about.
Employees who do these transactions move some fraction of their invested balances and maintain at least a small balance in the plan. Ongoing contributions and employer matching money (if any) still go into the 401(k) plan.
We do not advise clients on this issue one way or the other. There are costs and benefits to any course of action. These must be considered by each person in light of their own circumstances and goals.
Clients, when you are ready to talk about your retirement income strategy, please email us or call.
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