Typically, when you hear “rollover” you think retirement or changing jobs. For the vast majority of clients, these two situations will really be the only time they will complete a 401k rollover. However, you might not know about another type of situation in which you can move funds from your company retirement plan to your IRA. This is what’s known as the “in-service” rollover and is an often overlooked planning opportunity.
A rollover is a pretty simple concept. It is the process of moving your employer retirement account (401k, 403b, 457, etc.) over to an IRA that you have complete control over and is completely separate from your ex-employer. Most people do this when they retire or switch jobs. If completed properly, rolling over funds from your company retirement plan to your IRA is a tax and penalty free transaction because the tax characteristics of a 401k and IRA are generally the same.
What is an “in-service” rollover?
Unlike the “traditional” rollover, an “in-service” rollover is probably something you’ve never heard of and for good reason. First, not all company retirement plans allow for it, and second, even for those that do, the details can be confusing to employees. The bottom line: An in-service rollover allows an employee (often at a specified age such as 55) to be able to roll their 401k to an IRA while still employed with the company. The employee is also still able to contribute to the plan, even after the rollover is complete. Most plans allow this type of rollover once per year, but depending on the plan, you could potentially complete the rollover more often for different contribution types.
Why complete an “in-service” rollover?
More investment options – With any company retirement plan, you will be limited to the investment options the plan offers. By having the funds in an IRA, you can invest in just about any mutual fund, ETF, stock, bond, etc. Having access to more options can potentially improve investment performance, reduce volatility and make your overall portfolio allocation more efficient.
Coordination with your other assets – If you’re working with a financial planner, he or she can coordinate an IRA into your overall plan far more efficiently than a 401k. How many times has your planner recommended changes in your 401k that simply don’t get completed? (Tisk, tisk!) If your planner is managing the IRA for you, those recommended changes are going to get completed instead of falling off your personal “to-do” list.
Additional flexibility – IRAs allow certain penalty-free withdrawals that aren’t available in a 401k or other company retirement plans (certain medical expenses, higher education expenses, first time homebuyer allowance, etc.). Although using an IRA for these expenses should be a last resort, it’s nice to have the flexibility if needed.
Exploring “in-service” rollovers
So what now? The first thing is to always keep your financial planner in the loop when you retire or switch jobs to see if a rollover makes sense for your situation. Second, let’s work together to see if your current company retirement plans allows for an in-service rollover. It’s typically a 5 minute phone call with us, you and your HR department to find out. With so many things going on in life, an in-service rollover is probably pretty close to the bottom of your priority list. This is why you have us on your financial team. We bring these opportunities to your attention and work with you to see if they could benefit your situation!
Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc. Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s Money Centered and Center Connections blogs.
Matthew Trujillo, CFP®, is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Nick Defenthaler, CFP® & Matt Trujillo, CFP®, and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. IRA withdrawals may be subject to income taxes, and prior to age 59 1/2 a 10% federal penalty tax may apply. In-Service Rollovers mentioned may not be suitable for all investors. Be sure to contact a qualified professional regarding your particular situation before electing an In-Service Rollover. You should discuss any tax or legal matters with the appropriate professional. Investing involves risk and investors may incur a profit or a loss.