Investment Information

Can you withdraw money from your 401(k) while you are still employed? Not everyone should; not everyone can. However, if you can, it may mean that you can effectively implement part of your retirement income plan before you retire.

If your 401(k) plan permits it, you can take an in-service withdrawal and redirect some of your 401(k) funds into another investment vehicle that offers you income guarantees.

The reasons why. A non-hardship withdrawal can provide you with early access to a portion of your retirement assets, freeing you to manage them as you wish. If the mix of funds in your 401(k) have taken a big hit lately, you might be wondering how some of those assets would do in other kinds of investments, especially those with less risk exposure.

This very question has led some people to withdraw assets from qualified retirement plans such as 401(k)s and direct them into non-qualified annuities that they own independently. A non-qualified annuity contract may be structured to provide tax-deferred growth for retirement, or immediate income. You aren’t even required to take distributions at age 70½ (though your contributions aren’t tax deductible.) The annuity may be fixed or variable. Another nice feature: non-qualified annuities do not have annual contribution limits. (There are annual contribution limits on qualified annuities held within IRAs and employer-sponsored retirement plans.)1

Today, you can find popular non-qualified annuity investments that will allow you to take advantage of stock market gains while protecting your principal against stock market losses. Many of them offer the option of guaranteed lifelong income payments. Some of these annuities may let you allocate assets across a mix of stocks, bonds and funds through subaccounts.2

With features like these, you may be interested in these kinds of investments if you are approaching retirement age.

The 72(t) strategy to avoid the early withdrawal penalty. If you are still working and pull money out of your 401(k) before age 59½, you will almost certainly pay a 10% early withdrawal penalty plus income taxes on the money you take out.3 But you might be able to make early withdrawals with the help of IRS Rule 72(t).

Rule 72(t), based on life expectancy, lets you schedule fixed income withdrawals for five years or until you reach 59-1/2, whichever is longer.4 It lets you receive fixed, equal payments according to IRS calculations.

First things first: make sure you can do this. Talk with your employee benefits officer at work, and see that the Summary Plan Description (SPD) permits non-hardship withdrawals. Talk with your financial or tax advisor to make sure it is an appropriate move for you given your overall financial plan. If you know you’ll need more retirement income, there can be real merit to reinvesting early withdrawals from a 401(k) in vehicles that generate it.

You don’t have to take RMDs from your traditional IRA this year. On December 23, President Bush signed the Worker, Retiree, and Employer Recovery Act of 2008 into law, suspending all Required Minimum Distributions (RMDs) from IRAs, 401(k)s and 403(b)s for 2009.

This is sweet relief for people 70½ or older, especially people that don’t really need the IRA income. After all, no retiree wanted the “injury” of having to withdraw deductible IRA assets already hurt by the recession plus the “insult” of having to pay taxes on the RMD. You can leave that money in your IRA in 2009 without incurring a tax penalty – and if the markets recover in 2009, those invested assets can grow and compound.

So what if you turned 70½ in 2008? You still have to take your 2008 RMD by April 1, 2009. It should be calculated using your account balance as of Dec. 31, 2007. (This is assuming you haven’t taken it already.)

Now, what if you turn 70½ in 2009? Well, you can wait until the end of 2010 to take your first RMD, but the IRS will consider it to be your second RMD.

The IRS says that if you turn 70½ in 2009, you have the option of delaying your first RMD until April of 2010. If you decide to do that, you will have to take two RMDs in 2010: one by April 1, 2010 for the 2009 tax year and one by December 31, 2010 for the 2010 tax year.

But … since nobody has to take an RMD for 2009, those turning 70½ won’t be required to take a 2009 RMD by April 1, 2010. However, you will still have to take a 2010 RMD by December 31, 2010, which the IRS will count as your “second” RMD, even though you didn’t take a “first” one for 2009.

How does this affect me if I have an inherited IRA? You get a break. You can forego a mandatory withdrawal in 2009 and effectively give yourself an extra year toward that pesky five-year rule, which demands distribution of all assets in the inherited IRA no later than December 31st of the fifth year after the original IRA owner’s death.

What does this mean for IRA charitable rollovers? Suddenly, they’ve become less attractive for 2009 because of the RMD suspension. (After all, the amount of the charitable rollover counted toward your RMD.) But you can still directly donate to a charity from your IRA this year without incurring income taxes.

And what about Roth conversions? We might as well mention this piece of good news: in 2009, any withdrawals from a traditional IRA can be used to fund a Roth IRA. To convert a traditional IRA into a Roth IRA, your MAGI for 2009 (not including the converted IRA income) has to be $100,000 or lower.

Any chance of no RMDs in 2010? Well, who knows – with 2010 being such an experimental year for the federal tax code, Congress may decide to give older Americans another annual exemption from RMDs. But the odds of that happening seem pretty long. Most likely, deductible IRA owners 70½ or older and those who have inherited IRAs or 401(k)s will have to take mandatory withdrawals in 2010.

What does this mean for you? Do you need to take a withdrawal from your IRA, 401(k) or 403(b) in 2009? Should you leave the assets untouched this year? Should they be invested in a slightly different way? What could you do in 2009 to position yourself for 2010, when a horde of taxes will be waived and big tax breaks are available? It’s a good time to chat with a financial or tax advisor.