Investor Column | In-service withdrawal from certain retirement plans

An in-service withdrawal is a unique opportunity to withdraw from certain retirement plans while still working, if you are generally over 59 1/2. Check with your company for their details in writing.

Some reasons to do so are to get away from the company’s limited investment options and move where there are options, to get more investment advice and control, to convert your IRA into a Roth IRA, and more.

Check with your tax advisor as to how this strategy may affect you, since I do not give tax advice. The following are common strategies.

Let’s presume you are considering an in-service withdrawal from a company’s 401(k) to your new IRA account at a fictitious company called Friendly Investments as Custodian for your IRA.

Generally, if you are over 59 ½ and your company allows it, you may be eligible to do an in-service withdrawal of your money, but usually not the company’s match money.

Some or all of your account balance is usually available, after deducting for any loans or other items you have taken. The process may take a few weeks to do.

This may not affect your participation or match in the 401(k). You still contribute to and receive the company match to the 401(k) plan while you are employed.

Here are some choices for an in-service withdrawal. Choose wisely:

• Take the money and pay income taxes on all the money you withdraw. Best to avoid.
• Rollover the money into your new IRA. Pay taxes only on the money you take out of the IRA.

After considering all factors, you decide on a rollover. You open an IRA account at fictitious Friendly Investments. You name your beneficiaries in case you die. The in-service withdrawal rollover money goes from your company 401(k) into your IRA account. The process is as follows.

• 1Call the custodian of your company’s 401(k). The company will ask to identify yourself with items such as your Social Security number, PIN, date of birth, etc.
• Ask for an in-service withdrawal from your 401(k) since you are over age 59 ½. There may be company paperwork that they send to you.
• Ask for your balance in the 401(k) plan, excluding company match and outstanding loans. This is normally your maximum withdrawal amount. The rollover is generally not a taxable event because you are doing a rollover.
• Be sure to tell the company’s custodian NOT to withhold any taxes. This is a rollover to an authorized IRA Custodian and, if done properly, is not a taxable event.

This may be confusing so get help before you do anything that might cause a problem.

There are usually two options to receiving the rollover into your new IRA account.

The first option is for the company’s custodian to send you the rollover check. It would be payable to Friendly Investments as Custodian for your IRA account or to you. Ask the company when is the expected mailing date. This should only take a few weeks.

Be very sure to tell them you are doing a rollover and do not withhold any IRS taxes.

Once you get the check, you have up to 60 days from the date on the check to deposit the check into your Friendly Investment’s IRA account. Otherwise, the check could become fully taxable.

The second option is a direct rollover. The custodian will wire transfer the money directly from the company’s custodian to your Friendly Investments IRA account.

Once the money is in your IRA account, you will now be in control of your money. There are many things you can do with it.

• Pay taxes on each withdrawal from your IRA account.
• Set up a monthly distribution to be sent directly from your IRA to your checking account. You pay taxes only on each distribution. Ask your tax advisor for the appropriate withholding, such as 10%.
• Talk to your financial advisor about the strategy for managing your IRA.

Be careful with the in-service withdrawal. You do have money available to spend, but spend it wisely. It is meant to be your retirement money and it may have to last until your responsibilities stop when you die.

Jim Zientara is an investment consultant and financial planner with Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment Advisory Services are offered through Raymond James Financial Services Advisors, Inc. He can be reached at 941-750-6818 or at www.raymondjames.com/jz with office at 11009 Gatewood Drive, Suite 101, Lakewood Ranch 34211. Any opinions are those of Jim Zientara and not necessarily those of Raymond James. This material is being provided for information purposes only, and is not a complete description, nor is it specific investment advice. Consult a financial advisor about your unique situation. Raymond James Financial Services and its advisors do not provide advice on legal issues or tax matter.