The Pros and Cons of Early Retirement Rollovers – The Suffolk News-Herald
By Mark McGahee
Did you know that you may be able to use your 401 (k), 403 (b) or 457 plan and transfer it to another type of retirement account while you are still working? Let’s look at how these rollovers can occur and the pros and cons of doing them.
To start, a few basics. Distributions from 401 (k) plans and most other employer-sponsored pension plans are taxed as ordinary income, and if you take one before age 59 and a half, a federal penalty tax of 10% generally applies. In addition, 20% of the amount withdrawn is withheld for tax purposes. Generally, once you reach age 72, you should start receiving the minimum required distributions.
Now for the fine print. You may be able to receive a distribution from your employer-sponsored qualified pension plan while continuing to work, via an easy on-the-job withdrawal. This is done by arranging for a direct transfer of those assets to an Individual Retirement Account (IRA) to potentially avoid both the 10% penalty and 20% withholding tax in the process. It is important to note that this option is only available if your employer allows it.
It may be a good idea to speak to your financial professional before making any changes.
Typically, distributions from traditional IRAs should begin once you reach age 72. The money distributed to you is taxed as ordinary income. When these distributions are made before the age of 59 and a half, they may be subject to a federal penalty tax of 10%.
The criteria for making withdrawals during service without difficulty may vary. Some workplace pension plans simply prohibit them. Others allow it when you have been in office for at least five years or when your plan assets have accumulated for at least two years or you are 100% invested in your account.
Weigh the pros and cons. Who knows if your reinvested assets will perform better in an IRA than in your company’s pension plan? Only time will tell. Right now, you can put up to $ 7,000 in an IRA each year if you are 50 or older. The limit on annual additions, however, is much more impressive at $ 58,000 for 2021. Finally, if your employer matches your contributions to the pension plan, exiting the plan may mean losing future matches.
Mark McGahee can be reached at 757-539-9465 or [email protected]