There are a lot of pros and cons that affect whether early retirement plan rollovers are right for your personal circumstance. Today, I wanted to touch on a question I receive from almost every pre-retiree: should I roll over my employer-retirement plans into my own accounts while I’m still working?
There’s a lot of personal factors that go into this decision, but I wanted to briefly touch on the basics to help shed some light on a common question.
Let’s dive in and look at how early retirement plan rollovers happen and the pros and cons of them
Distributions from 401(k) plans and most other employer-sponsored retirement plans are taxed as ordinary income, and if you take one before age 59½, a 10% federal income tax penalty commonly applies.
In addition, 20% of the withdrawn amount is withheld for tax purposes. Generally, once you reach age 72, you must begin taking required minimum distributions.1
Related: Roth IRA versus Traditional IRA
Now, the fine print…
You may be able to take a distribution from your qualified, employer-sponsored retirement plan while still working, via an in-service non-hardship withdrawal.
This is done by arranging a direct rollover of these assets to an Individual Retirement Account (IRA) in order to 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.2
If you’re thinking of making this change or need help navigating your own personal situation, please be sure to contact our office before making any changes. We can help you look at all angles of your circumstances and create a strategy that’s aligned with your financial goals.
How do Distributions Work?
Generally, distributions from traditional IRAs must begin once you reach age 72. The money distributed to you is taxed as ordinary income. When such distributions are taken before age 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.
Others permit them when you have been on the job for at least five years or when assets in your plan have accumulated for at least two years or you are 100% vested in your account.2
Related: Most Asked Questions about Taxes in Retirement
When it comes to making big decisions like this on early retirement plan rollovers: weigh the pros and cons.
Who knows if your reinvested assets will perform better in an IRA than they did in your company’s retirement plan? Only time will tell.
Right now, you can put up to $7,000 into an IRA, annually, if you are 50 or older. The limit on annual additions, however, is much more impressive at $58,000 for 2021.
Lastly, if your employer matches your retirement plan contributions, getting out of the plan may mean losing future matches.3
There are so many personal factors when it comes to preparing for your retirement. My goal is to help navigate and provide all the education I can to help you make the right decision for your personal circumstances.
We’re happy to work with you either in person, over the phone, or virtually, based on your preference. Give our office a call and we can schedule some time together.
1. IRS.gov, March 3, 2021
2. IRS.gov, March 3, 2021
3. IRS.gov, March 3, 2021