A potentially powerful and often overlooked investment strategy
Most people are under the impression that they can’t touch their qualified employer plan such as a 401(k) until they reach age 59 ½ and are no longer employed. What people don’t know is that many qualified plans allow what is called an “in-service rollover” of their account balance. This allows a current employee to open an IRA account and rollover part of their balance to the new IRA account. This can be done all while continuing to work and contribute to their employer plan.
As investment advisors, we often hear from people complaining about the lack of investment options or lack luster performance inside their 401(k) account. If you find yourself thinking this, or wish you had an investment advisor to manage your account for you, an in-service rollover might be right for you.
There are many potential benefits to an in-service rollover from your 401(k) account to an IRA account. Many 401(k) accounts provide very few investment options and most do not allow individual stocks to be purchased. Inside an IRA an investor has access to a much wider array of mutual funds, individual stocks, bonds and other investments that can diversify a portfolio and potentially add additional growth and income. In addition, by having an IRA account with an advisor, an investor has access to retirement planning and other financial services not typically offered by employer plans.
If you think an in-service rollover might be right for you then the first step is to find out if your company allows this kind of withdrawal. You’ll want to check with your benefits department for the specific guidelines of your employer plan. You may want to enlist the help of an investment advisor to review the details of your plan summary document as there may be limitations or certain restrictions that apply.
It’s important to understand that normal distributions from a qualified plan are subject to income tax and distributions under the age of 59 ½ could be subject to a 10% early withdrawal penalty. By taking an in-service rollover and moving the assets into an IRA, you would not be subject to a tax liability and you would maintain the benefits of tax-deferred growth.