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What’s a 401k In-Service Distribution?

Carl Ostenson

Question: Is it possible to move your current 401k plan into a self directed IRA, before you retire?

Answer: Usually YES, but you have to be 59 ½ or older. It’s called a 401k In-Service Distribution.

You may have a good reason why you would want to move your 401k somewhere else:

  • More investment options
  • Lower fees
  • Lock in some gains and put the money someplace safer
  • Some kind of annuity for future income

Whatever your reason is, a 401k In-Service Distribution allows you to roll a portion of your 401k balance into your own self directed IRA, while you are still working, which you can then invest how you see fit.

NOTE: An In-Service Distribution is completely different than a 401k rollover from a place that you stopped working at. When you leave an employer, it is called a triggering event. In most case you can move that money at any age. What we are talking about in this article is moving your current 401k while you are still employed at your current employer.

An In-Service Distribution can also work for other types of plans like 403bs, 457s etc. In all cases the transfer is tax free when you do it properly.

Steps to Take for 401k In-Service Distributions

  1. Call your Human Resource Department or 401k Plan administrator and ask if your (401k, 403b) plan allows an In-Service Distribution and how much of your vested balance you can move
  2. Figure out what kinds of investments you would rather have your 401k invested in, at this point of your life
  3. Get all the necessary paperwork filled out

You are reading this on an Annuity Education site. In my world of safety and income planning using annuities, clients use In-Service Distributions to protect what they have now, and set up their income, so they know what they will get in the future, when they retire.

The perfect age range would be 59 ½ up to about age 67, and you still have a couple years to go before you retire.

Let’s say you are 60 years old right now and you plan on retiring in 5 years.

You look at your 401k statement and you see how much it’s gone up over the past 5 years. Hooray.

Then you remember the crash in 2001 and losing over 50%.  That was awful. You were 47 years old then with plenty of time to recover, and maybe you did.

Then you think about the crash again in 2008. You lost a lot then too, but you were still only 54 years old.  You still had a decent amount of time to recover, and maybe you did.

But now you are 60 and you will need income starting in 5 years when you retire. You want that income to be dependable and come in every month, without fail, no matter what’s going on in the stock market or the economy.

If you were to lose 50% of your 401k value again, between now and when you retire, that would hurt worse than a sharp stick in your eye.

The problem is most 401k plans don’t offer a way for you to lock in some of your gains right now, and shift into a program where you know exactly what your income will be when you retire in 5 years.

To do that, you will need to look at options outside your 401k plan. Specifically, learn more about annuities.

Now is as good of time as any to look at what your options are.

One popular option for income planning, that sees Billions of dollars going into it every year are indexed annuities with income riders.

  • Your principal is protected in case the market crashes
  • Your interest is linked to the market, so if the market does keep going up, you will participate in some of the gains too
  • BUT the big reason is the guaranteed income that it will provide you in the future, when you need it

So the option for an In-Service Distribution is there for you if want to take advantage of it. If your plan allows it, and you qualify, you can move a portion of your 401k while you are still working.

  • Some of you like trading stocks and would rather move your 401k to a place where you could do that more easily
  • Some of you may want investment options that are not available in your current 401k plan
  • Some of you may want safety and income with annuities.

Whatever your choice is, an In-Service Distribution can open some new options for you.

Some things to consider about In-Service Distributions. Be sure you compare costs, creditor protection, tax consequences and how it would affect future contributions to your current 401k plan before doing an In-Service Distribution.

Resources for Retirement Income Planning

Here are some additional resources if you want to learn more about income planning options for an In-Service Distribution:

  • There’s an 8 minute video called Paycheck For Life that goes into some more details and gives you a few examples of how these accounts work. There’s also a form you can fill out to request an illustration based on your situation. You can access that here: http://protectmyira.com/paycheckforlife/.

Or, if you have some questions, or need some help getting pointed in the right direction use this feedback form and I’ll get back to you within 24 hours – http://protectmyira.com/contact/.

Click here to see more educational articles from Carl Ostenson.

About the Author:

Carl Ostenson specializes in helping his clients use their IRA or 401k to set up their Retirement Income Plan for when they retire. He works with clients in the Chicagoland area and surrounding suburbs.

If you live in Chicagoland and want to talk about annuities with a local guy, give Carl a call at 847-376-8400… there’s never any pressure. To get more about Carl, visit: www.ProtectMyIRA.com.

Be sure to check out his Free IRA Guide titled “How to Get Secure and Predictable Income From Your IRA/401k When You Retire.”

 

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