With persistent market volatility, it’s a good time to review long-term investments to make sure your clients’ portfolios are well positioned to pursue their long-term goals.
Rebalancing can be particularly challenging within a client’s 401(k) assets, if the plan does not offer diverse investment options. Clients may want to reallocate funds to better manage risk, but find their choices are limited. Over time, this limitation could hinder their ability to meet their goals.
Some clients may have the option to take a portion of their 401(k) assets with an “in-service” withdrawal and place the money in an IRA to invest in other strategies. This provision allows participants to take a withdrawal without providing proof of hardship, if they have reached age 59½ or have met the requirements specified by the plan.
But not all plans have this provision. To find out if your client’s plan allows it, ask for a copy of the plan’s Summary Plan Description. Or you could review the year-end statement, which may have a separate column for in-service withdrawals.
Another requirement of in-service withdrawals is that they must be rolled over directly into an IRA or another qualified plan in order to avoid income tax. Before you recommend this action, you should also check state laws regarding protection of assets from creditors. State laws that protect IRA assets from creditors outside of bankruptcy vary. You would also want to make sure that the 401(k) plan does not offer other benefits that may be valuable to your client but unavailable from an IRA, such as loans.
For more information, download our Opportunity in 401(k) non-hardship withdrawals literature piece.
Diversification and rebalancing will not necessarily prevent you from losing money; however, they may reduce volatility and potentially limit downside losses. Non-hardship withdrawals are subject to income tax, and those made before age 59½ may be subject to an additional 10% tax.