The Hidden 401(k) Benefit You May Have Missed

When most of us think about 401(k)s, the movie “Fun with Dick and Jane” is probably the last thing on anyone’s mind. The classic 2005 Jim Carrey film tells the story of an affluent couple’s turn to a life of crime following the collapse of Globodyne.

Though a fictional corporation, Globodyne’s downfall mirrors the very real Enron scandal in 2001, which affected thousands of employees’ livelihoods and eventually led to financial reform through the Pension Protection Act of 2006. The Enron scandal highlighted the risk that many employees of publicly traded companies could have concentrated exposure or over-exposure to a single company, including wages and benefits, individual stock positions, and even neighborhood communities. The new legislation sought to allow employees to diversify away from the concentration of risk by including the provision for retirement plans to allow for In-Service 401(k) Rollovers for the first time.1

What is an In-Service Rollover?

The common assumption has been that if you want to roll over your 401(k) to an IRA, you are required to wait until after you leave a company and are no longer a participant of the employer-sponsored plan. Employees over the age of 59 ½, however, may have the option to transfer funds from their 401(k) into an IRA while still employed and contributing to the plan, through what’s known as an In-Service Rollover.

The In-Service Rollover strategy allows you to continue contributing to your 401(k) to receive an employer match (if there is one) while increasing the number of investment choices available to you because of the addition of the IRA. Not all 401(k) plans have the In-Service Rollover feature, so we recommend checking your 401(k)’s plan document, which you can typically get from the plan administrator and/or from the 401(k) website once you are logged in.

Why an In-Service Rollover?

Whether you roll your 401(k) over to an IRA while you’re still employed or after you leave the company, the move provides several advantages, as we outlined in a previous 401(k) rollover blog post. The most common advantages are increased investment choices, tax control, and access to other investment products. Additionally, one notable but not widely known benefit is that your professional advisor management fees can be taken directly from the IRA tax free. Instead of withdrawing the management fee and accruing tax upon withdrawal, your financial advisor can pull it directly from pre-tax dollars in the IRA, in effect letting the IRA pay its own management fee.

How can I complete an In-Service Rollover?

In-Service Rollovers require a few simple steps — the same ones you would follow at any stage of your life — to transfer your 401(k) funds to an IRA. Remember that a rollover is different from a withdrawal; withdrawals are subject to taxes and fees, whereas rollovers are not.

Step 1: Consult with a financial advisor to determine if this option is advantageous to you, as it’s not a one-size-fits-all solution.

Step 2: Coordinate with your financial planning team to open a traditional IRA and/or Roth IRA.**

Step 3: Once the new account is set up and you have the account number, contact your employer or 401(k) administrator to request and complete a 401(k) rollover form (Note: Some custodians allow you to give the instruction directly over the phone or even process it online).

Step 4: Work with the 401(k) custodian and your financial advisor to transfer the funds into your IRA.

If you’re interested in completing an In-Service Rollover, talk to a CWM financial advisor today. We’re here to help you navigate the path to financial independence to live richly.

**Note: If your employer plan is a Roth 401(k), it will roll into a Roth IRA. The information outlined above applies to both traditional and Roth 401(k) plans.

1 Source: Investopedia, The Pension Protection Act of 2006—And How It Still Helps Retirement

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