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In-Service Withdrawals

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But I want to Protect what I have..In-Service Withdrawals!

I can’t remember a time when I have received more phone calls about protecting 401(K) balances from clients and referrals. It seems that this long running bull market has caused a number of 401(K) balances to swell, so clients are calling to asl about locking in their balance.

For years, I have stressed that “no one ever went broke taking a profit!” However, maybe some of the best advice is to know when to hold them or when to fold them. I applaud the investment decisions that people are making with their money when they feel it’s what’s best for them.

Recently, a client shared with me that they had always felt that once they reached $1 million in their 401(K), it was the number that they needed to make their retirement a reality. As my client told me, “the pain that I would feel seeing my account drop by 10% is far greater than me making another $50k!” Frankly, it’s ironic when you consider that many *market strategists feel that with vaccines rising and the economy booming that the market still has a ways to go. However, if Covid or 2008 taught us anything, it’s that things could change very quickly and as an investor, you should know when the time is right for you!

What question seemed to invariably come next was, “What can I do protect my balance?” or “The cash account option is yielding literally nothing!” Besides lower yields, clients also told me that many of the conservative investment allocations seemed to be struggling, or even losing money! What I noticed was that many of those conservative investment sub-accounts had large positions in bonds, so they were suffering from the fears of interest rates rising or inflation concerns. Then there was the target date funds but they had larger stock allocations which could be risky if the market corrected. Unfortunately, time and time again many options just weren’t meeting their expectations.

However, I asked each of them if there company had an “in-service withdrawal” provision, which obviously led to complete blank! An in-service withdrawal allows an employee to take a distribution from their 401(K) to pursue different investment options outside the plan. The money is then rolled in to an IRA account, so you can choose a variety of different investment options, like an annuity strategy to protect you from the downside of the stock market.

A number of existing 401(K) plans have this option available, so you need to ask your HR director or plan administrator if it’s available. Once an employee has reached 59 ½ years of age, in-service withdrawals are permissible, but many plans allow it before 59 ½ as well. Also, you should understand what portion that you can move because normally you are limited to employer’s match or contributions, but every plan is different.  Remember, this has nothing to do with traditional hardship or documented financial need withdrawals.

If you don’t like the current investment options or want to diversify outside your plan, make sure that you inquire about in-service withdrawal. You may also want to ask:

-Are in-service withdrawals available?

-What conditions apply?   

-What are the tax consequences?

Besides figuring out where you want to invest the money, finding a good planner or adviser to help you through this process is probably a good idea. I would advise against simply moving the money to “chase returns” or trade stocks but every situation is different. It would be a shame to lose money if this is for your retirement dreams by throwing caution to the wind, but as a diversification tool or to adopt a better protection strategy, an in-service withdrawal could be very attractive.

Pat Moran has over 35 years of financial services experience and is a managing partner at Healthier Money. He is independent and specializes in financial education, reducing risks and tax favored strategies. He can be reached at (602) 571-1035 or www. 


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