When her employer began cutting staff, Jan Killion decided it was time to make use of a little-known feature of her company-sponsored 401(k) retirement plan.
It’s called an in-service 401(k) rollover, and it allows you to move part of your current 401(k) money into your personal IRA while you’re still working for your employer.
A 60-year-old Roanoke, Texas, resident who works in leadership development and project management, Killion opted to make the move in March.
“They started doing (workforce) reductions here, and I didn’t know whether I was going to be impacted by that,” said Killion, whose husband works at the same company. “I decided to move forward and move it out.”
Killion was fortunate that her company offers this option. Not many companies do.
“We don’t see it in the large markets,” said Patti Balthazor Bjork, director of retirement research at employee benefits consulting firm Aon Hewitt.
If anything, companies are becoming more restrictive, she said.
“They’re making it more difficult to take your money out early because of some of the penalties,” Bjork said.
Employers who do offer this option typically will make you keep a certain percentage in their plan, Killion said.
“I went to the max that I could take out, which I believe was 80 percent.”
Killion said she plans to continue the practice and move funds out again at the end of the year. She also said her husband plans to do the same when he turns 591/2.
That age threshold is crucial because 401(k) distributions received before age 591/2 are subject to a penalty of 10 percent additional tax.
“You’ve got to do it correctly,” said Rick Salmeron, a certified financial planner at Salmeron Financial in Dallas who counts Killion among his clients.
He also notes that there is a 60-day window for account holders to move their money into an IRA after withdrawing it from their 401(k). This can be accomplished either by a direct transfer from your 401(k) plan to the IRA or by having the money sent to you for deposit into your IRA.
If your company offers this rollover option, think things through carefully before you move any money. There are valid reasons for moving your money as well as for maintaining the status quo. Here are the pros and cons:
Why it’s a good idea:
• More investment options: This flexibility will better allow you to diversify your retirement assets, Salmeron said.
• More control over how you invest: “With your funds in an IRA, you are the account owner and have more control over your assets, free from the restrictions your employer-sponsored plan can impose,” Salmeron said.
For Killion, it came down to just that.
“I want to have more freedom to choose what I want to do with it,” she said.
• Potential cost savings: “One obvious reason to consider an in-service rollover is to escape a bum plan that has higher-than-normal expenses,” Salmeron said.
Why it’s not:
• Financial emergencies: If need be, you can take out a loan or a hardship withdrawal from your 401(k), but you can’t do either with an IRA.
• Higher costs: “Just because you have your own IRA doesn’t mean its costs are automatically lower,” Salmeron said.
• The temptation to spend it: “Although we don’t like to admit it, for most of us, the primary advantage of an employer-sponsored retirement plan is the fact that the money goes in directly and cannot be easily accessed,” said Tom Murphy, certified financial planner at Murphy & Sylvest in Dallas.Pamela Yip is a personal finance columnist for the Dallas Morning News. Readers may send her email at firstname.lastname@example.org; she cannot make individual replies.