401(k) one-time withdrawl

[Guest mngreenfield]

My wife works for a local company in which she participates in their 401(k) plan, and has done so for 2 years now. The problem is that they only offer Fidelity Funds, and we want to switch. A friend of ours that does financial planning stated that 401(k) participants are allowed a ONE-TIME withdrawl from their 401(k) and may roll-it into self-directed IRA without any penalties or owing any tax. Is she allowed to do this?

Michael

[jpod]

If she is not at least 59-1/2 years old, only if she quits her job.

[J2D2]

And even if she is at least 59-1/2, only if the plan allows in-service withdrawals.

[2muchstress]

Does anybody else think that qualified plans (especially distributions from) need to be tested heavier on the Series 7?

But not to digress any further, I would say that it seems like you will be stuck with the funds that are offered in the plan. However, trustees have a fiduciary duty to monitor the plans investments. If you are unhappy with the investments, you may not be completely powerless to get them changed. Your wife should discuss her concerns with the appropriate people and they may be willing to change investments or add new ones. Sometimes it just takes one employee to get the ball rolling.

[Guest JEP]

Many plans offer a one time a year distribution from rollover funds. If the participant worked elsewhere prior to the current company and rolled the assets from her previous 401(k), she may be eligible to withdraw these funds. The document will address this issue.

[Kirk Maldonado]

There are financial planners that are propagating this lie to generate more funds that they can invest for their clients.

One such person approached a huge number of employees at one of my clients with this outrageous proposition. He told the employees that the employer was breaking the law if the employer wouldn't let the employees withdraw their funds. Needless to say, he got all of the employees in an uproar.

I spoke to the financial plannner who swore that he had an opinion from a law firm that the withdrawals were required by law. I asked for a copy of it, but I never heard back from him.

My guess is that if you transfer the funds to such an investment planner, he or she will abscond with the funds. That is definitely the impression I got with the sleazebag that approached the employees of my client.

[2muchstress]

The 500+ plans I have seen do NOT have this provision. Some plans may allow for an in-service withdrawl of rollover money, some may allow for an in-service withdrawl after the participant reaches a certain age, or becomes 100% vested, or only for those funds that are 100% vested. But this is very few of them, less than 5% (probably like 1%).

I would be very curious to read a plan that allowed for annual withdrawls. There is absolutely no reason to put that in a plan and it makes no administrative sense. If I ever administer a plan with such a provision, you can rest assured that my fee schedule would definately factor in the charges for all the additional work, notices, filings, etc.

Plans can be written to say almost anything, but there should definately be some thought and foresight into the planning.

After all, we are dealing with RETIREMENT plans.

[MGB]

I once was in a plan that allowed annual withdrawals and I did it every year. (Note that this is not 401(k) elective deferrals, which cannot be withdrawn -- it was after-tax contributions.) By the way, it was at one of the largest benefit consulting firms in the country.

At the time I could not afford to put money away for retirement, but I did want the employer match. They matched my after-tax contributions and allowed me to withdraw it every year without losing the match.

Once the new pro rata rules kicked in after Tax Reform, this became less and less feasible as the total account balance (matches and profit sharing) became more and more tilted towards tax-deferred money. This caused my after-tax contributions to be quickly triple-taxed (once before going in, once when I took it out the following January (or most of it anyway), and the 10% extra tax).

[2muchstress]

I understand the benefit from a participant standpoint, but could you explain how this would benefit a plan sponsor?

[Guest JEP]

2muchstress,

if interested, the fdp and ppd documents from Corbel both contain this language. I'll agree with you that it does not make a lot of sense administratively. I was only attempting to point out that this may have been what the broker was referring to. We find this feature very common in the plans we administer and have taken over.

[mbozek]

I have always assumed that withdrawals of 401(k) amounts are restricted to age 59 1/2, death, disability, hardship and termination. Amounts rolled over from another plan and after tax contributions can be transferred at any time if the plan provides. Employer contributions to a PS plan can withdrawn after 2 years of participation if the plan provides.

2much: Why do you assume that the advisor is a broker?? Maybe he/she only has a series 6 or is an RIA.

[2muchstress]

MJB-

Obviously my assumption was just that, an assumption. Regardless of whether he passed a Series 7 or Series 6, I strongly believe that anybody who represents themselves as being a financial advisor, a financial planner, a retirement planner, etc, etc. should have a better understanding of how qualified plans work.

Everyday of the week I hear of brokers/advisors giving bad advice about the operations of plans. My humble opinion is that they either need to be required to learn about qualified plans during their studies, or stick to advice on investments.

[mbozek]

2much: I teach retirement planning to CFP candidates and it is very difficult for them to learn the terminology and the artifical distinctions of the many types of retirement plans in the space of a 20 to 30 hour course of instruction. Most professionals do not have the head space or attention span to learn all of the nuances of DB, DC, 403(B) plans, IRAs, simples, etc that Congress keeps changing because they cannot spend their days reviewing every change in the law or regulations. The better advisors know when they should get professional help. The problem is that many clients do not want to pay for professional advice on tax or ERISA issues. They think the advice should be free because they are purchasing an investment product.

[Guest Gordy]

mbozek: If most professionals "dont"t have the headspace....." then they shouldn't be giving advice in that area. Making a commission shouldn't be the number one priority. I hope you convey this to your students.

[joel]

The Hon. Max Baucus

Chairman, Committee on Finance

United State Senate

Washington, DC

Dear Senator Baucus:

As you know the ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001, effective 1-1-02, permits different types of retirement plans to be rolled over from one to another so that an individual may consolidate all of his/her different types of plans under one retirement account.(401k, 403b, 401a, 457, and IRA)

Situation: Employer has offered a 403b plan for 35 years but just began to offer a 457 and a 401k plan. In order, however, to rollover 403b funds to the 457 or 401k plan an employee must satisfy a distributable event listed under IRC sections 403(b)11 and 403(B)7. These triggering events are: death, disability, separation from service or attainment of age 59.5. These obstacles should be waived when an employee is desirous of effectuating a rollover distribution to another eligible retirement plan. The employee should not have to wait until age 59.5, or separation from service (death or disability are not too desirous)in order to consolidate his/her retirement accounts. A law to have these hindrances eliminated when an in-service employee wants to rollover 403b funds to another eligible plan enumerated under EGTRRA should be enacted by the Congress.

Please advise.

Peace,

Joel L. Frank