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The Pros and Cons of Early Retirement Plan Rollovers Thumbnail

The Pros and Cons of Early Retirement Plan Rollovers

You may be able to roll your 401(k), 403(b), or 457 plan into another type of retirement account while you're still working. See if you're eligible for this!

RMDs are required for IRAs, but they aren't the only distribution that you can make.


The basics

Distributions from 401(k) plans and most other employer-sponsored retirement plans are taxed as ordinary income, and if you take one before the age of 59½, a 10% federal income tax penalty commonly applies.1 In addition, 20% of the withdrawn amount is withheld for tax purposes. Generally, once you reach 72, you must begin taking required minimum distributions.

The fine print

You may be able to take a distribution from your qualifying, employer-sponsored retirement plan while still working via an in-service non-hardship withdrawal.2 This is done by arranging a direct rollover into an individual retirement account (IRA), and you may potentially avoid both the 10% penalty and the 20% tax withholding in the process. It’s important to note that this option is only available if allowed by your employer.

Generally, distributions from traditional IRAs must begin once you reach the age of 72. The money distributed to you is taxed as ordinary income. When such distributions are taken before the age of 59½, they may be subject to a 10% federal income tax penalty.

The criteria for making in-service non-hardship withdrawals can vary. Some workplace retirement plans simply prohibit them, while others allow them under certain conditions. Check with your plan administrator to see if in-service non-hardship withdrawals are available to you. Additionally, speaking with one of our financial advisors at California Retirement Advisors before making any changes will ensure that you are making the best decision for yourself.

Weigh the pros and cons

Will your assets perform better in an IRA or in your company’s retirement plan? As with any investment strategy, it is challenging to predict the outcome.  Right now, you can put up to $7,000 into an IRA annually if you are 50 or older.3 If your employer matches your retirement plan contributions, getting out of the plan may mean losing future matches.

By Christian Cordoba
Founder, California Retirement Advisors

  1. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds
  2. https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions
  3. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits

Investment advisory services offered through Mutual Advisors, LLC DBA California Retirement Advisors, a SEC registered investment adviser. Securities offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Securities, Inc. and Mutual Advisors, LLC are affiliated companies. CA Insurance license #0B09076. This content is developed from sources believed to be providing accurate information and provided by California Retirement Advisors. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. California Retirement Advisors, nor any of its members, are tax accountants or legal attorneys and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional.