In Service Distribution- 401k Rollover While You’re Still Working

Remember the good old days of whistling while you work in regards to your 401k?  Your company used to have a very nice match to your 401k.  Your balance was at at all time high and retirement seemed like just over the horizon.   Then 2008 came along and the whistling turned into more of a whimper.  Don’t worry, I was whimpering, too.   For those that are 59 1/2 and still working, I might have a reason for you to whistle again.  The reason behind it is called the 401k in-service distribution.

I took a call from a client recently whose employer was getting ready to switch 401k providers again (3 times in the last 5 years) and was frustrated with the new investment options.   He is over 59 1/2 and had heard that he might be able to rollover his 401k to an IRA and also continue to fund his 401k.   I was excited to share with him that he in fact could do this and that the procedure was called an in-service distribution.
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401k In Service Disbtributions: What You Need to Know

in-service-distributionA client of mine was looking to retire May of 2008. But when the market turned in the wrong direction, he decided to postpone his retirement. His 401k provider had been switched a couple years back and was not really satisfied with his current options. He was over 59 ½ and decided one day to take advantage of an in service distribution.

*Update:  You can do an in service distribution with a pension, too.

In Service Distribution- Should You or Shouldn’t You

An in service distribution allows you to rollover your vested balance from your profit sharing plan to an IRA. You will have to determine first if you are eligible. Some plans may restrict from doing so. Potential advantages may include:

  • Control— Who doesn’t like control? With an IRA, you are the account owner and have more control over your assets, free from the restrictions your employer-sponsored plan can impose.
  • Diversification — Many employer-sponsored plans offer limited investment options. In contrast, most IRAs typically provide a wider range of investment choices across virtually every asset class. This flexibility can help you better diversify your retirement assets to meet your individual investment goals.
  • Beneficiary options — Typically, IRAs allow non-spouse beneficiaries to “stretch” an inherited IRA over their lifetimes. This type of beneficiary distribution option is not available in most employer-sponsored plans, which may limit distribution choices for your beneficiaries. [Read more...]

My Employer Changed 401k Providers, Now What?

Occasionally, I have had people inquire to me about what happens when their company changes 401(k) providers. Usually when such an event occurs, there is a lot of confusion and uncertainty about what is going to happen with their money. To prevent you from making any ill advised decisions, please read more.

It Might Not Be That Bad

First, I’d like to give some reassurance that just because your company is changing 401(k) providers it is not necessarily a bad thing. Depending on your current investment selections, your new 401(k) may have better options, could be less costly to you, and you may get better service than you did with your previous provider. Obviously, everything I just stated could be the exact opposite, so you never know what could happen.

How the change works

You have just  received the change notice and you’re scared out of your mind because you have no idea what it all means, take a breath. <Gasp> Okay, realize that you don’t have to do anything. Whatever your investment selection was in the current plan should convert over to the new plan. For example, if you were in a balanced model that had you 60% stock and 40% bonds, you should be in the same type model in the new plan, just with different options. This conversion period is what they call the black-out period which means you won’t be able to make any changes to your 401k allocations. So if you want to convert it all to money market because you think the market is going to tank, do it now before it’s too late.  And if you have some sixth sense of know that this is going to occur, please share with the rest of us so we can follow suit.

401k Options

But as an employee, you do have a few choices on what you can do.

1. If you are over the age of 59 1/2, you can do what is called an in-service distribution. I wrote about this in a previous post that talks about some of the pros and cons of doing such. If you are absolutely sure that your new 401(k) provider is somebody that you do not want to have your money invested with, then this may be an option that is best suited for you.

2. If you are under the age of 59 1/2, you are pretty much limited on what you can do with your existing 401(k). One option is if you are currently fully maximizing your 401(k) and putting in more than it requires to receive your match, you could then just put in the minimum to get the match and divert the remaining into your own personal IRA, either a traditional or a Roth. (You could not add any money to the new 401k at all, but you should always take the company match no matter what). Doing so would then have the least amount of money in the 401(k), which you are trying to stay out of, and then having more control with your investment selections inside the IRA. Once you then retire or leave your current employer, you will be able to roll over your 401(k) out of the plan that you were trying to avoid.

Unfortunately, under the age of 59 ½ you are limited on your choices. Don’t be too disgruntled in the beginning. Do your research on the new plan and meet with a Certified Financial Planner™ to make sure you are properly diversified.

Securities office through LPL Financial, Member FINRA/SIPC