Presented by David Corwin
If you’re like most of the agents I work with, you’re running out of ideas to share with your clients or wondering what you can do to improve your client’s retirement accumulation planning.
Under qualified retirement plan regulations, generally speaking, you can’t make a withdrawal from your plan unless you terminate your employment or your plan is terminated. You can access your plan money before retirement if you qualify for hardship withdrawals – which is usually a result of death or disability. However, you can take money out of your retirement plan while still gainfully employed by way of a Non-hardship (sometimes called in-service) withdrawals. These withdrawals are only allowed for people who are participants in 401(k), 403(b) and profit-sharing plans, and only to the extent of an individual’s vested balance in the plan. If allowed by your employer, in-service withdrawals can give you access to your retirement assets, thus giving you more control over them. It’s important to note that not all company-sponsored retirement plans offer these in-service withdrawals.
Why would your client want to make this type of withdrawal prior to retirement?
• More flexible in the investment choices that may not be offered in their current plan.
• To simplify estate planning.
• Professional Guidance: You may choose to have your retirement plan assets managed by a professional and may need to make a plan withdrawal to make that possible.
• Income planning – your client may want to plan for retirement so that they know exactly how much they will have to live on (Roth IRA).
The Tax Increase Prevention Reconciliation Act (TIPRA) tax laws now permit in-service, non-hardship withdrawals before age 59½. If the employer plan permits, the employee must also be eligible to take a distribution from the plan, and the funds have to be eligible for a direct IRA rollover. Your clients should request a copy of the Summary Plan Description (SPD). If you ask and no one seems to know where it is, then call the toll-free number on your plan statement and ask a person if in-service, non-hardship withdrawal distributions are an option. If permitted, also inquire if withdrawals will prevent you from further participation in your employer-sponsored plan (be sure to check on this). If it is permissible and you want to make the move, you better make an IRA rollover with the assets withdrawn. If you don’t, that distribution out of your qualified retirement plan will be slapped with a 20% federal withholding tax and federal and state income taxes. Yes, you will also incur the 10% early withdrawal penalty if you are younger than age 59½. Additionally, if you have taken a loan from your 401(k), any in-service withdrawal might cause it to be characterized as a taxable distribution in the eyes of the IRS. Obviously, this IRA rollover possibility isn’t exactly making your plan provider all that happy, but many employees would like broader range retirement options and some would like vehicles designed to produce future income streams.