In-Service Distribution from 401k to IRA
we have a client who is under 59 1/2 yrs old and wants to take an In-Service Distribution from his company sponsored 401k Plan account and move those dollars to his IRA. he is still employed. as we study the issue it appears there are the following limitations to him doing this. is there anything he can do or is he possibly locked in? any way to chanhe the 401k plan to allow for this type of distribution to an IRA?
Thank you,
Ed
401k:
– IRS Guidelines
a. Deferral Dollars (from the salary of any participant including owners), can distribute after attaining age 59 ½
b. Plan Document can tighten up the ability to take an “in service distribution”
c. Rollout to an IRA, no taxes or penalty’s at 59 ½
d. Rollout to Non-IRA, Taxes (no penalties since 59 ½ )
– Plan Document; can change parameters to allow for distributions of the following
a. Profit Sharing Dollars
b. Safe Harbor Dollars
c. Matching Dollars
d. Vested Dollars only (if Vesting Schedule applies)
e. Rollout to
1. IRA, no taxes or penalties
2. Non-IRA. Taxes and if under 59 ½ you would pay penalties
Permalink Submitted by Alan Spross on Tue, 2011-11-29 23:31
Most plans are more restrictive than the IRS regarding non hardship in service distributions. Typically, certain classes of the plan balance such as after tax contributions and earnings thereon and rollovers done into the plan from other plans are allowed to be distributed while in service, with actual deferrals the most age restricted. Plans get expense breaks from investment providers for larger balances, so they often opt not to offer the broadest possible in service distribution options. If enough employees petition the employer to broaden these options, the employer might agree to change the plan document.
Once the plan is amended to allow in service distributions, the plan must offer the usual direct rollover option for these distributions.
Some plans offer to accept after tax contributions and offer in service distributions. Since the pre tax balance in the plan is not eligible, the employees are basically able to periodically transfer these after tax contributions directly to a Roth IRA in what is mostly a tax free conversion. Earnings on these contributions usually are distributed at the same time and are taxable when converted, but the earnings do not amount to much if employees can convert shortly after making the contributions.