The Pros and Cons of In-Service Retirement Plan Rollovers

Should you withdraw and reinvest your retirement plan money while you are still employed?

Did you know you might be able to take some or all of the money in your 401(k), 403(b), or 457 plan and roll it over into another type of retirement account? Were you aware that you could do this while you are still working for your current employer – without any withholding or early withdrawal penalties?

There is often a little-known aspect to retirement plans that allows employees of a certain age (typically 55 or 60) to rollover a portion of their account to an IRA while they’re still working and contributing to the plan. This is called an In-Service withdrawal or rollover to an IRA. Usually, we don’t think to rollover our 401ks until we’ve left the employer, but in an era when many of us have large balances in the retirement plan, knowing this tip could be a helpful tool to achieve several financial planning goals. For example, you may have limited investment options in your 401k plan or you may find the mutual fund expenses are high. Rolling over a portion to an IRA would give you a wider range of investment options that you could choose yourself or hire an investment adviser to build you a portfolio that complements your remaining retirement plan assets. Another goal may be simplified estate planning. Rather than naming multiple beneficiaries on your 401k which may affect their ability to stretch their inherited IRA, you could utilize an In-Service rollover to create a separate account with a beneficiary such as a charity with a fixed dollar amount or a sibling who follows different rules than your children, once they inherit your 401k.  

How would this affect your RMDs?  If you’re nearing 72 (the new age to take your first Required Minimum Distribution or RMD), it’s important to understand that RMDs are not required to be taken from employer-sponsored retirement plans like 401ks, so long as you’re still employed. If you rollover a portion to an IRA, you will have to take a distribution from that IRA which will count as taxable income. Here again, this could be seen as an advantage to making an In-Service rollover if you’re in the 24% or lower federal marginal tax brackets because you may find yourself in a higher tax bracket in your 80s.

What if I make Back-Door Roth IRA Contributions? If you’ve been reading our newsletters, then you’ve learned about the “Back-Door” Roth IRA strategy. Remember, this strategy works best when you do not have an IRA so performing an In-Service rollover would mean skipping the Roth IRA contribution. However, if you haven’t been doing those, you could now begin to convert some IRA to Roth IRA – another great strategy if you’re in the 24% bracket or less.

The criteria for making in-service withdrawals can vary. First, check your Summary Plan Description (SPD) on your plan provider’s website or simply call them to learn if In-Service rollovers are available. Typically there are parameters such as your age and how long you’ve been in the plan. Also, there’s usually a limit as to how much you can rollover while still employed.

Weigh the pros and cons. If this is available to you, it’s important to understand why you would want to make an In-Service rollover.  Compare the costs as well as investment expertise you currently receive to what you could receive. Fully understand the tax ramifications if you’re over 72 or taking advantage of some strategies to build up your Roth IRA assets. 

Here at Kendall Capital we believe it’s especially important to look at your whole picture not only today but in the future. As Fee-Only Fiduciary advisors, we see opportunities like In-Service rollovers as just another tool to utilize if it’s in our client’s best interest. Whether we manage 401k assets or an IRA, makes no difference to us. But it could mean a big difference in your future income tax or estate planning goals.