These days, many pre-retirees save for retirement primarily through an employer-provided 401(k). 401(k) accounts can be a great savings tool, especially if your employer matches your contributions. But there are occasions when relying on a 401(k) account isn’t the best option.
For example, some employers don’t match their employees’ contributions, which takes a major shine off these types of accounts. Other 401(k)s have a narrow range of investment options to choose from, leaving employees dissatisfied and frustrated with the results they’ve been getting. Many of these people would love an alternative, but don’t feel like there is one.
The good news is that there may indeed be an alternative. It is called an “in-service withdrawal.”
You see, most people believe that withdrawing money from your 401(k) before you retire will trigger additional taxes and penalties. And that’s true—except if your company’s retirement plan has an in-service withdrawal feature. Here’s how it usually works. For companies that permit it, workers can begin withdrawing funds from their 401(k) starting at age 59½ without incurring any early-withdrawal penalties. You can use the money you withdraw to invest in an IRA (which will often have a wider range of investment choices) or some other vehicle if you so choose. Of course, the money would be considered ordinary income and taxed as such, but that can be a small price to pay if you’re unhappy with how your retirement savings are currently invested.
One popular tactic is to withdraw a portion of the funds inside your 401(k) for placement inside an IRA. The remainder can be kept inside the 401(k). This gives you the best of both worlds: the IRA’s wider range of investment options, combined with continued access to your company 401(k) and any contribution-matching that comes with it.
It is important to note, «Salutation», that in-service withdrawals aren’t right for everyone. Again, 401(k) accounts can be a great tool, and may in fact be the best place for your money to be. But if you are not satisfied, it’s worth looking into whether your employer permits in-service withdrawals.