An under-used and misunderstood strategy that can help you preserve your assets while managing risks associated with investing.
Let us review a few of the basics of the “age 59 ½ in-service withdrawal.” Many company plans such as 401(k), 403(b) and Thrift Savings Plan (TSP) for federal employees, allow participants to withdraw funds while you are still employed, after reaching the age of 59 ½. You generally have three options:
- Transfer the funds in your employer’s retirement plan to an IRA
- Leave your funds where they are
- Cash out the account
Please carefully consider all of your options before making a move. Be sure you know the benefits and potential drawbacks involved with rollovers. A rollover of your vested funds to an IRA will not terminate your participation in your 401(k) or TSP, meaning you can continue to contribute to the account after exercising your withdrawal. Deposits will continue from your paycheck along with any matching contributions your employer makes.
Why you may want to consider a rollover to an IRA as you are approaching retirement?
1. As you approach retirement your level of risk should decline.
The reason for this is because you are at an age when you no longer have time for your assets to recover from a major bear market. Someone in their 40’s may have 20+ years to recover market losses like those experienced in the years 2001 and 2008 when many markets declined 50% or more. The 59 ½ in-service withdrawal allows you to move any amount of your funds to an IRA that is designed for your risk tolerance and specific retirement goals. If you decide to leave your funds with your employer, you can still adjust your asset allocation in line with your financial objectives, time horizon and risk tolerance.
2. This option can be used to broaden the diversification of your retirement funds.
As you approach and enter retirement you are moving from the accumulation phase to the distribution phase of your life. In the distribution phase, you are typically more interested in producing income and less interested in the growth of assets, although we believe some growth is needed for inflation protection. Your new account funded by your in-service withdrawal can potentially have a more income and preservation orientation. Having more than one account can help you develop a balance between risk and growth as you enter your retirement years.
3. Many company retirement plans may have limited investment options available to manage your retirement funds.
For example, they may not offer specific sectors or alternative investments. Also, they may not offer fixed income accounts or guaranteed income options offered by annuities. Keep in mind that guarantees are based on the claims-paying ability of the issuing company. These options may allow you to better manage both the diversification and eventual distribution of income from your account(s). However, it is important to understand all of the options within your current plan before removing funds because you may already have features or options that are beneficial to you.
4. The management, allocation and distribution of your company plan is up to you as the owner.
Essentially, you are on your own. Most plans are not able to provide specific investment advice, nor can they offer tax or planning advice. You simply do not have an advisor with your plan. So, unless you are willing to study and understand the structure and risk associated with investing your life’s savings it may be beneficial to seek out a qualified advisor regarding investing and the distribution of your funds.
Best Choice for You
Investing involves risks and there is no guarantee that any particular strategy will work under all market conditions or protect against a loss in a declining market. Markets and other factors may cause declines in the value of your account. You should carefully consider your investment objectives, risk tolerance, liquidity preference and time horizon before considering a rollover.
When you work with any of the advisors at Medallion Financial Group, you will get help charting a course through the complex world of wealth management and tax planning. We work together to build a dedicated, long-term, and disciplined approach that is tailored to your unique needs and objectives. Are you ready to start a conversation?
About the Authors
John and Laura Stohlman have been working with clients to help them achieve retirement success since 1987. Both John and Laura have the following designations: Certified Financial Planner (CFP®) and Chartered Federal Employee Benefits Consultant (ChFEBC®).
For over 30 years, federal employee retirement planning has been a key focus of Medallion Financial Group. We recognize that FERS retirement benefits have extra layers of complexity, such as the Thrift Savings Plan (TSP), 401K, Pension plan, FEGLI and more. It’s easy to get lost in a sea of bad advice when so few people understand the basics. We help with the basics and beyond to enable our clients to get the education and advice they need to retire with confidence.
Our focus is twofold: first and foremost, we are fiduciary advisors. We stand against any violation of laws, values, and ethics. Second, we treat our clients as part of our family, not only those who call Maryland and Georgia home, but clients across the US who have benefited from our reputation of personal service, integrity, and expertise.
We strive to exceed client’s expectations – because we have high expectations of ourselves.