What is an in-service, non-hardship withdrawal?
An in-service, non-hardship withdrawal is the ability to roll money out of your retirement plan before separating service into an IRA. Not all 401ks have the option to allow participants to take an in-service distribution, but in a lot of cases, your largest investible asset outside of your house, is in your 401k plan, and the investment choices are A. typically limited. And B. the advice is limited. So, you have this big asset that you are really relying upon, that you may want to get yourself educated on how to roll the money out prior to separating service.
How do I know if I am eligible for a non-hardship withdrawal?
You will need to check with your plan sponsor to see the specific details of the plan. You could also look for the summary plan description(SPD) on the plan sponsors website.
If allowed, it typically starts at age 59 ½.
Are there any pros or cons of an in-service, non-hardship withdrawal?
The primary reason to consider rolling it out is control and flexibility with your investments. Potentially your largest asset, IRAs may allow for greater overall diversification through investments such as individual stocks, ETFs, individual bonds, no load mutual funds, CDs, separately managed accounts, and many other investment choices. I would say that the biggest reason somebody would consider rolling the money out is the almost unlimited choices that are available on the outside. Continuing with that, when would a non-hardship withdrawal make sense? I would say if you have a significant percentage of your investible net worth in the plan; you are going to potentially benefit from the increased choices.
Take a company like Boeing, for example. There are about 18 investment choices and if you have 70%, 80%, 90% of your retirement net worth in there you might want more options. Maybe the 18 investment choices in there are not the best ones for you.
An example of when it might not make sense, is if you are still working. There are no RMDs (required minimum distributions) from your 401k plan, if you’re still working. So, if you are 72 and still working, if you have the money in your IRA, even though you’re working, you are taking an RMD if it is in your IRA.
Another reason it might not make sense is if you do not know how to manage it. If you roll it out and you do not really have anybody to give you advice, in the plan through the plan sponsor you might be better off at least with some help versus no help.
Lastly, I would say one other potential reason to not take the money out is borrowing. I do not typically recommend borrowing against your 401k, but you cannot borrow against an IRA. So, if you’re still working and let us say you’re 62 a typical scenario would be that the company might allow you to take 50% of up to $100,000, which would be a $50,000 loan against your 401k. You may want to leave part of the money in, if you thought, I may want an extra safety valve that I may need to tap that money into without triggering a taxable event. That is really erroring on the side of caution to leave some money. If you think you may want to borrow, many people have enough other assets that they do not need to have that potential. But if you feel like that is a concern, that is, that could be a reason not to take a full-in service, non-hardship, and leave some money. But again, for that to even apply, you still must be working for the company. You cannot have a loan against a 401k if you have separated service.
Still have questions? We are here to help. If you would like us to look at your retirement and see if you are utilizing the best possible options, we would love to meet with you and learn more about your goals to see if there is a good fit for us to work together. Reach us at 562-432-3783 or info@mbpwm.comto schedule a free introductory meeting.