Can you withdraw money from your 401(k) while you are still employed?
Not everyone should; not everyone can. However, if you can, it may mean that you
can effectively implement part of your retirement income plan before you retire.
If your 401(k) plan permits it, you can take an in-service withdrawal and
redirect some of your 401(k) funds into another investment vehicle that offers
you income guarantees.
The reasons why. A non-hardship withdrawal can provide you with early
access to a portion of your retirement assets, freeing you to manage them as you
wish. If the mix of funds in your 401(k) have taken a big hit lately, you might
be wondering how some of those assets would do if they were invested
The self-directed IRA option. Some people are withdrawing assets from
qualified retirement plans such as 401(k)s and place them in self-directed IRAs.
An SD-IRA can allow you to invest your assets in real estate, commodities, and
other sectors indirectly correlated or uncorrelated to stocks. While many kinds
of IRAs can be converted to self-directed IRAs, you need to have an IRA
custodian that will allow an SD-IRA and let you make non-traditional investments
using IRA assets. This IRA custodian has to be a registered trust company.1
You can take a self-directed IRA one step further and set up an IRA LLC. With an
IRA LLC, you have “checkbook” control and don’t need your IRA custodian’s
approval to make non-traditional investments.1,2
Many SD-IRA owners invest in income property or other forms of real estate.
Contrary to public perception, IRA assets may be invested in real estate and
other options besides securities (providing your IRA custodian allows this).
There are some notable prohibitions: IRS Code Section 401 IRC 408(a)(3)
prohibits life insurance contracts from being held in IRAs, and IRS Publication
590 states that your IRA will be hit with additional taxes if you invest in
The 72(t) strategy to avoid the early withdrawal penalty. If you are
still working and pull money out of your 401(k) before age 59½, you will almost
certainly pay a 10% early withdrawal penalty plus income taxes on the money you
take out.5 But you might be able to make early withdrawals with the help of IRS
Rule 72(t), based on life expectancy, lets you schedule fixed income withdrawals
for five years or until you reach 59-1/2, whichever is longer.6 It lets you
receive fixed, equal payments according to IRS calculations.
First things first: make sure you can do this. Talk with your employee
benefits officer at work, and see that the Summary Plan Description (SPD)
permits non-hardship withdrawals. Talk with your financial or tax advisor to
make sure this is an appropriate move for you given your overall financial plan.
If you know you’ll need more retirement income, there can be real merit to
reinvesting early withdrawals from a 401(k) in vehicles that generate it.
These are the views of Peter Montoya Inc., not the named
Representative nor Broker/Dealer, and should not be construed as investment
advice. Neither the named Representative nor Broker/Dealer gives tax or legal
advice. All information is believed to be from reliable sources; however, we
make no representation as to its completeness or accuracy. The publisher is not
engaged in rendering legal, accounting or other professional services. If other
expert assistance is needed, the reader is advised to engage the services of a
competent professional. Please consult your Financial Advisor for further
2 realtytimes.com/rtpages/20060320_irarealestate.htm [3/20/06]