As retirement nears for clients, it is more important than ever for financial advisors to evaluate their clients' retirement investing strategy. In fact, if clients are within 5 years before or after retirement day,
they've already entered the most critical time of their investment life. The decisions the advisor helps clients make during this 10-year span may have a fundamental impact on how they spend the next 20 to 30+ years.
Traditionally, retirement plans have allowed participants to access their plans only if certain events occur, such as changing jobs or retiring. But today, many plans also offer currently employed participants the option of taking plan withdrawals while still working. These are known as "in-service withdrawals."
Many plans permit in-service withdrawals at age 59 1/2 . Some profit sharing plans allow individuals under age 59 1/2 to take them. In-service withdrawals from defined benefit plans are generally not permitted before age 62. The Summary Plan Description will state the plan specifics.
Such withdrawals are typically rolled to a traditional individual retirement account. But several types cannot be rolled, including (though not limited to) required minimum distributions and hardship withdrawals.
Why consider in-service withdrawals for participants who are still working? Because the withdrawals have a number of advantages, including the following:
o Control. The account owner can access funds at any time, without the restrictions the employer plan can impose.
o Flexibility. IRAs typically provide a wider range of investment choices across virtually every asset class.
o Aggregation. Combining all retirement assets in a single account facilitates a comprehensive plan for the investment of those assets.
o Protection. The investment options in most employer plans are designed for the accumulation phase. Rolling funds to an IRA can enable clients to choose funding vehicles that offer downside protection for income purposes and guaranteed lifetime income. For instance, IRA assets may be invested in a variable annuity, which offers optional living benefits that, at an additional cost, provide a guarantee of lifetime retirement income, with potential for income increases (but not decreases) based on market performance.
o Beneficiary options. Typically, IRAs allow non-spouse beneficiaries to "stretch" an inherited IRA, taking payments (and deferring taxes) over their lifetimes. This type of beneficiary distribution option is not available in many employer plans, which may limit distribution choices for beneficiaries.
Roth conversions offer other possibilities. With the passage of the Pension Protection Act of 2006, funds in an employer plan, including in-service withdrawals, can now be converted directly to a Roth IRA, without first having to transfer the funds to a traditional IRA. The $100,000 adjusted gross income limit would apply in 2009. Beginning in 2010, any employee–regardless of income–may convert 401(k) funds to a Roth IRA.
