Retirement: In-Service 401k-to-IRA Rollovers
Keith S. was inspired by the notes on NUA to send me this excellent information about in-service 401k transfers. This is a strategy some working Corning employees use. I heard about this strategy while I was working, but I could never get someone to explain it to me like I'm a 5-year-old. Keith does a pretty good job.
With any financial strategy there can be caveats. When I've mentioned this strategy, people who retired before age 59-1/2 quickly point out that their company 401k is available to them starting at age 55, but moving it out of the company 401k means those funds won't be available until age 59-1/2. This is also true for previous employer 401k's that may have been rolled over. Keith pointed out that if someone contributes post-tax, and those contributions are rolled into a Roth IRA that's been held for at least 5 years, those funds are 100% available at any age. The status of the gains is still unclear to me. I'm also linking an article on the subject:
https://www.investopedia.com/terms/i/inservicewithdrawal.asp
I think this strategy is good for two situations:
- You want to take an active roll in investing your retirement savings. I know people who working their own investments every week. I don't recommend using a "day trader" approach with your retirement savings.
- You have a financial advisor who'd like to invest your retirement savings differently than the company 401k allows.
Here's Keith's note:
I know I've discussed this before with you, but might be worth spreading to any of the yet to retire folks on your distribution.
Corning (Empower) does not let you do in-service rollovers on Pretax or Roth Contributions. However, they do allow in-service rollovers of After Tax Contributions. Anyone interested in keeping their retirement investments outside of Empower can make After-Tax Contributions, and roll them over to an external Roth IRA periodically. When you do this, Empower will also roll over the Company Match contributions that were made along with the After Tax contributions. The company match funds can be rolled to a Traditional IRA with no tax implications, or rolled into a Roth IRA if you want to do the conversion on that money and pay the taxes. Additionally, any gains on these contributions can be rolled into either the Traditional IRA or Roth IRA (if you want to pay the taxes).
There are many advantages of moving your retirement investments into an external investment account before you retire:
- Access to the contributions at any time without penalty or tax owed (This applies to the funds rolled into the Roth IRA, you may have to have the Roth IRA for 5 years though)
- Access to unlimited investment options
- Possibility of letting your financial advisor take over your account and managing it for you
- You can borrow (short term) against the Roth IRA via a "60 day rollover" (There are limitations here, for example only once per year)
- You can get lots more money into your Roth IRA than you can using the annual Roth IRA contribution limit. (It's called the Mega-Back-Door-Roth)
It's a little bit of a pain to do, especially if you are married because your spouse's signature has to be notarized on the rollover form. Attached (links below) is the form and letter I include when I do the rollover. I just upload it through the Empower website and get a check about a week later.