CONTRIBUTORS
Bill Cass, CFP®, CPWA®
Director of Wealth Planning,
Franklin Templeton
Faced with uncertainty about the economy or managing rising prices in recent years, many individuals have consistently saved for retirement.
While it’s an advantage to stay committed to saving, sometimes savers may want to access or transfer their funds ahead of retirement, and for a non-emergency purpose.
Most participants are well served to retain savings within their employer plan for a variety of reasons (for example, lower fees, access to loans), and many plans allow in-service and non-hardship distributions while still working.
What is an in-service, non-hardship distribution?
Generally, participants can take “in-service” withdrawals (withdrawals while currently employed) if they provide proof of hardship. To request a hardship distribution, a plan participant must demonstrate an immediate financial need, such as medical expenses. For hardship distributions of pre-tax retirement savings, taxes apply as well as a 10% early withdrawal penalty for those under age 59½. Lastly, recent changes to retirement laws have expanded the ability to access funds in a retirement plan (For more information see, “New ways to avoid early withdrawal penalties from retirement accounts.”).
Many 401(k) plans also allow in-service, non-hardship withdrawals. This special provision allows participants to take 401(k) withdrawals—without providing proof of hardship—if they have reached age 59½ or have met the requirements specified by the plan document. These participants have the option to directly transfer savings to an IRA without penalty or withholding, assuming certain conditions are met. Transferring savings from the employer plan to an IRA may allow access to a broader range of investment choices, for example.
Shifting assets out of the plan
Before implementing this type of IRA transfer, there are several considerations for plan participants.
- Check applicable state laws regarding protection of assets from creditors. Federal bankruptcy law protects IRA assets rolled over from qualified employer retirement plans from creditor claims in bankruptcy proceedings. But unlike 401(k) assets, which are nearly universally protected from creditor claims outside of bankruptcy as well, states protect IRA assets from creditors outside of federal bankruptcy proceedings to varying degrees. While many states will fully protect IRAs from creditors, others may not provide any protection or limit protection for IRAs to the amount necessary to support the account owner and dependents, which can be subjective.
- Most plans will allow a participant to take a loan against their retirement savings. This is an example of a feature available within 401(k) plans which is not available through an IRA.
- If you hold highly appreciated employer stock in a 401(k) plan, partial distributions may jeopardize valuable tax benefits that may be available with respect to the stock (For example, net unrealized appreciation (NUA) treatment of in-kind distributions of employer stock). To understand the NUA strategy, see “Understanding the NUA rule.”
- Consult a qualified tax professional for more information.
Evaluating whether an in-service, non-hardship withdrawal makes sense
Managing your retirement savings effectively
With a broad array of options available to save and plan for retirement, it’s important to determine the right option, or mix of options, based on your personal circumstances. For more information on key factors on whether to hold retirement savings within an employer plan, or transfer funds to an IRA, consult with a financial professional to determine the impact on your financial plan. For more details, see “In-service, non-hardship withdrawals.”
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor, and does not constitute, and should not be construed as investment advice, forecast of future events, a guarantee of future results, or a recommendation with respect to any particular security or investment strategy or type of retirement account. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional.
Franklin Templeton, its affiliated companies, and its employees are not in the business of providing tax or legal advice to taxpayers. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties or complying with any applicable tax laws or regulations. Tax-related statements, if any, may have been written in connection with the “promotion or marketing” of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.