In-service rollover
I have a client who is 58 years old as of Dec 2023 and wants to do an in-service rollover from his employer’s 401(k) to an IRA with a brokerage of his choosing for better investment management. The client is still employed and has been for decades with this employer, the balance of his account is over 1 million. Can he do that before he is 59 1/2 without triggering the 10% early distribution penalty and taxing the distributions? His plan administrator is verbally confirming that he is allowed to do it since he is over 55, as long as they transfer it to the other plan administrator directly. However, they are refusing to provide him with the written plan documents.
I advised him against the move before he is 59 1/2, as I do not see wanting a better investment opportunity to be a qualified event recognized by the IRS and worry that without seeing the written plan, the distribution may become taxable. I understand that some 401(k) plans allow for in-service rollover before 591/2, but is it wise to do it without a written copy. Also, does allowing an employee to do an in-service roll over guarantee that there won’t be penalties and taxes for doing so before reaching 59 1/2? Should he do it now or wait to 59 1/2?
Any advice is appreciated. Thanks.
Permalink Submitted by Alan - IRA critic on Thu, 2023-12-28 22:39
The tax code does not allow an in service (non hardship) distribution off elective deferrals prior to 59.5. With respect to gains and employer matching contributions, the plan document determines when these amounts are eligible. The main risk is that the plan administrator misinterprets the plan document and distributes amounts not authorized by the plan, or in the case of the elective deferrals, not allowed in the tax code. I would feel more secure if a major plan administrator handles any rollover request. If the amount distributed is eligible for rollover, there will be no tax or penalty. It is extremely rare that a plan would process a distribution not allowable under the plan document, but it’s disconcerting if they indicated that elective deferrals could be rolled out.
Permalink Submitted by PaulC on Fri, 2023-12-29 18:19
Plan participants have a right to see the plan documents. Refusing to provide those is an odd, and disconcerting, position for a plan administrator to take.