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The Pros and Cons of Early Retirement Plan Rollovers

Did you know that you may be able to take your 401(k), 403(b), or 457 plan and roll it into another type of retirement account while you are still working? Let’s look at how to do this type of rollover and the associated pros and cons. 

To start, here are some basics. Distributions from 401(k) plans and most other employer-sponsored retirement plans are taxed as ordinary income, and if you take one before the age of 59½, a 10% federal income tax penalty commonly applies.1 In addition, 20% of the withdrawn amount is withheld for tax purposes. Generally, once you reach 72, you must begin taking required minimum distributions.

Now, the fine print. You may be able to take a distribution from your qualifying, employer-sponsored retirement plan while still working via an in-service non-hardship withdrawal.2 This is done by arranging a direct rollover into an individual retirement account (IRA), and you may potentially avoid both the 10% penalty and the 20% tax withholding in the process. It’s important to note that this option is only available if allowed by your employer.

Generally, distributions from traditional IRAs must begin once you reach the age of 72. The money distributed to you is taxed as ordinary income. When such distributions are taken before the age of 59½, they may be subject to a 10% federal income tax penalty.

The criteria for making in-service non-hardship withdrawals can vary. Some workplace retirement plans simply prohibit them, while others allow them under certain conditions. Check with your plan administrator to see if in-service non-hardship withdrawals are available to you, and speak to your financial professional before making any changes.3

Weigh the pros and cons. Will your assets perform better in an IRA or in your company’s retirement plan? As with any investment strategy, it is challenging to predict the outcome.  Right now, you can put up to $7,000 into an IRA annually if you are 50 or older.4 If your employer matches your retirement plan contributions, getting out of the plan may mean losing future matches.

  1. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds
  2. https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions
  3. https://www.investopedia.com/terms/i/inservicewithdrawal.asp
  4. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.