Tapping into Company-sponsored Retirement Plans While Still Employed

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1 RETIREMENT PERSPECTIVES Tapping into Company-sponsored Retirement Plans While Still Employed February 12, 2015 Brian Dobbis, QKA, QPA, QPFC, TGPC Director, Retirement Solutions The rules governing in-service distributions are complex and constantly changing. It is important to be familiar with the rules and their nuances to avoid making costly errors Views An employer-sponsored retirement plan may serve as an ef f ective and powerf ul tool in helping investors reach their retirement goals. Unf ortunately, all plans aren t created equal; some may lack certain f eatures or impose restrictions that make it more challenging to achieve those goals. Inservice withdrawals provide f lexibility by allowing participants to withdraw and/or roll over their account while employed That said, retirement plans are intended f or retirement. Consequently, rules governing distributions generally discourage participants f rom withdrawing f rom their accounts prior to that. However, the IRS recognizes certain distributable events, such as separation f rom service, that enable participants to distribute their accounts earlier. There also are times when plan participants are eligible to distribute or roll over all or part of their retirement accounts while still employed, and without demonstrating a specif ic f inancial need or hardship an event ref erred to as an in-service distribution. Of particular importance is an understanding of the rules governing when participants may be eligible f or an in-service withdrawal. Although permitted by the regulations, a plan sponsor (employer) is not required to of f er in-service withdrawals. It is an optional plan provision employers might choose. A recent survey by the Prof it Sharing Council of America (PSCA) indicated that 77% of 401(k) plans allow f or in-service withdrawals. 1 In-service distributions potentially are available f rom a variety of qualif ied retirement plans, such as 401(k)s, prof it-sharing plans, pension plans, employee stock ownership plans (ESOPs) and 403(b) plans. But they do not f ollow a one-size-f its-all approach: dif f erent withdrawal rules govern dif f erent types of contributions (e.g., salary def erral, match, prof it sharing, rollover, etc.). The inservice rules that apply to qualif ied plans do not apply to employer-sponsored IRA plans, such as SEP, SAR SEP, or SIMPLE IRAs. Generally speaking, IRA distribution rules allow a participant to roll over their assets at any time. Why Take an In-service Distribution? There are several things that might prompt employees to withdraw their savings f rom their employer-sponsored plan, such as high f ees, limited investment choices, or an inability to customize the plan to an individual s specif ic needs. But by rolling over assets into an IRA, participants have more control and options. It is important to know that an in-service distribution, by itself, typically is treated as ordinary 1

2 income and could trigger a tax liability. Participants younger than 59½ could also incur a 10% earlywithdrawal penalty. But if the distribution is rolled over into an IRA, a participant will continue to benef it f rom tax-def erral status and not incur an immediate tax liability or penalty. Which Plans Permit In-service Distributions? Many, but not all, employers offer non-hardship withdrawals during employment. To find out if your clients (or prospects) are eligible, ask your clients to provide a copy of their employer s Summary Plan Description (SPD), which of f ers a simplif ied explanation of the company s retirement plan rules set out in a Q&A format. Usually, there is a section titled: When are benefits available for distribution? For advisors seeking out IRA rollover opportunities, Lord Abbett of f ers Insights & Intelligence a proprietary, easy-to-use tool that can assist you in locating qualif ied retirement plans that of f er inservice withdrawal options through companies in your community. Here are general plan-by plan guidelines to assist in your client discussions. 401(k) Plans - Regulations restrict access to employee salary-def erral contributions (pretax and/or Roth), and employers saf e harbor contributions (match and/or non-elective) bef ore the participant is 59½ years old. In other words, these specific pools of money are off limits to participants younger than 59½, even in plans that permit in-service withdrawals. That makes older individuals ideal candidates. - However, the age restriction does not apply to an account that was previously rolled over f rom a prior employer s plan or f rom an IRA. Rollover accounts of ten are unrestricted. The SPD will provide guidance. - Af tertax (not Roth) contributions are generally eligible f or an in-service withdrawal. Recent taxpayer-friendly rules of f er participants the capability of moving these dollars to a Roth IRA potentially tax-f ree. - Small-business owners have the option to amend their plan to permit in-service distributions; but this option must be available to all employees. Profit-Sharing Plans - Plans may offer in-service distributions at any age. - Participants may take a distribution af ter as little as two years of service. - Only assets that have been in the plan for at least two years are eligible. - Some plans allow in-service withdrawals of af tertax amounts (not Roth). The SPD will provide guidance. Pension Plans (Defined Benefit, Money Purchase and Target Benefits Plans) - In general, pension plans do not allow f or in-service distributions except at the normal retirement age. The Pension Protection Act of 2006 added language to allow plans to make in-service distributions available as early as age 62. The SPD should provide guidance. SEP IRA and SIMPLE IRAs - SEP IRAs generally are easier to handle, because the assets are already in IRA accounts. There are no applicable withdrawal restrictions, which makes transf ers easier. - SIMPLE IRA accounts must be established for at least two years before funds can be 2

3 transf erred to any other account except another SIMPLE. - SIMPLE IRAs can accept rollovers only f rom another SIMPLE IRA. 403(b) Plans - Participant may be eligible f or an in-service distribution upon turning age 59½, provided that the plan document permits such distributions. - A contract exchange allows for the transfer of all or some portion of a participant s account to another 403(b) vendor included in the employer s plan. - The plan document must list all eligible 403(b) providers. Governmental 457(b) Plan - In general, an in-service distribution is available at 70½ (not 59½). - Permits one-time only, in-service, small-account-balance distribution that applies to accounts valued at $5,000 or less and to which no contributions were made for the preceding two years, assuming the plan of f ers this provision. Why Should a Participant Consider an In-service Rollover to an IRA? - More diverse selection of investments. - Additional contributions permitted af ter rolling over. - Beneficiary flexibility Participants who are married generally can name anyone as their benef iciary. (Note: Dif f erent rules apply f or community property states.) - IRA assets can be accessed (rolled over) once a year without taxes and/or penalties, as long as they are repaid within 60 days. - Potential access bef ore age 59½ to periodic payments, without being assessed the 10% earlywithdrawal penalty, under Section 72(t) of the Internal Revenue Code. - Ability to convert assets to a Roth IRA. - Additional exceptions to the 10% early-withdrawal penalty include: 1) higher education; 2) f irsttime home purchase; and 3) medical insurance premiums while unemployed. - Legacy planning via Stretch IRAs. That said, there are times when rolling over assets into an IRA may not be appropriate or the optimum choice. (For an overview, see our blog, IRA Rollovers: Finding the Right Fit. ) Individuals should consult with their advisors. Advisors should f amiliarize themselves with the rules governing in-service withdrawals, which can provide another route of access to the $7.2 trillion IRA market. PSCA s 57 Annual Survey of Prof it-sharing and 401(k) Plans. 1 th A 401(k) is a qualif ied plan established by employers to which eligible employees may make salary def erral (salary reduction) contributions on an af ter tax and/or pretax basis. Employers of f ering a 401(k) plan may make matching or non-elective contributions to the plan on behalf of eligible employees and may also add a prof it-sharing f eature to the 3

4 plan. Earnings accrue on a tax-def erred basis. Traditional IRA contributions plus earnings, interest, dividends, and capital gains may compound tax-def erred until you withdraw them as retirement income. Amounts withdrawn f rom traditional IRA plans are generally included as taxable income in the year received and may be subject to 10% f ederal tax penalties if withdrawn prior to age 59½, unless an exception applies. Roth IRA is a tax-def erred and potentially tax-f ree savings plan available to all working individuals and their spouses who meet the IRS income requirements. Distributions, including accumulated earnings, may be made tax-f ree if the account has been held at least f ive years and the individual is at least 59½, or if any of the IRS exceptions apply. Contributions to a Roth IRA are not tax deductible, but withdrawals during retirement are generally tax-f ree. An IRA rollover may involve the application of f ees and charges to the investor. There may be f ees, expenses, taxes and penalties associated with early IRA withdrawals. SEP IRA A Simplif ied Employee Pension Plan is a retirement plan specif ically designed f or self -employed people and small-business owners. When establishing a SEP IRA plan f or your business, you and any eligible employees establish your own separate SEP IRA; employer contributions are then made into each eligible employee's SEP IRA. SIMPLE IRA A Savings Incentive Match Plan f or Employees' IRA is an IRA-based plan that gives small-business employers a simplif ied method to make contributions toward their employees' retirement and their own retirement. Under a SIMPLE IRA plan, employees may choose to make salary reduction contributions and the employer makes matching or non-elective contributions. All contributions are made directly to an individual retirement account (IRA) set up f or each employee (a SIMPLE IRA). SIMPLE IRA plans are maintained on a calendar-year basis. To comply with Treasury Department regulations, we inf orm you that, unless otherwise expressly indicated, any tax inf ormation contained herein is not intended or written to be used, and cannot be used, f or the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, or recommending to another party any transaction, arrangement, or other matter. The opinions in the preceding commentary are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. This material is not intended to be legal or tax advice and is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. Investors should not assume that investments in the securities and/or sectors described were or will be profitable. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information. Investors should consult with a financial advisor prior to making an investment decision. Investors should carefully consider the investment objectives, risks, charges and expenses of the Lord Abbett Funds. This and other important information is contained in the fund's summary prospectus and/or prospectus. To obtain a prospectus or summary prospectus on any Lord Abbett mutual fund, you can click here or contact your investment professional or Lord Abbett Distributor LLC at Read the prospectus carefully before you invest or send money. Not FDIC-Insured. May lose value. Not guaranteed by any bank. Copyright 2018 Lord, Abbett & Co. LLC. All rights reserved. Lord Abbett mutual funds are distributed by Lord Abbett 4

5 Distributor LLC. For U.S. residents only. The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett s products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances. 5