Faith Based Investing

RULES change for IN-SERVICE 401(k) rOLLOVERS 

401(k)-to-Roth rollovers are now possible before age 59½.

A new possibility. Sometimes employees want to pull money out of a 401(k) before they retire. It isn’t always because of an emergency. Some workers want to make an in-service non-hardship withdrawal just to roll their 401(k) assets into an IRA. Why? They see lower account fees and greater investment choices ahead.

As a result of the Tax Increase Prevention Reconciliation Act (TIPRA), tax laws now permit in-service non-hardship withdrawals from 401(k), 403(b) and 457 plans to traditional IRAs and Roth IRAs before age 59½. Of course, the employee must be eligible to take a distribution from the plan, and the funds have to be eligible for a direct IRA rollover.

This option may be very interesting to highly compensated employees who want the tax benefits of a Roth IRA. The income limits that prevented them from having a Roth IRA have been repealed, and they may have sizable 401(k) account balances.

Does the plan allow the withdrawal? Good question. If a company’s 401(k) plan has been customized, it may allow an in-service withdrawal for an IRA rollover. If the plan is pretty boilerplate, it may not.

The five-year/two-year rule also has to be satisfied. IRS Revenue Ruling 68-24 says that for an in-service withdrawal from a qualified retirement plan to take place, an employee has to have been a plan participant for five years or the funds have to have been in the plan for two years.

401(k) plan administrators may need to amend their documents. Does the Summary Plan Description (SPD) on your company’s 401(k) plan allow non-hardship withdrawals? If it doesn’t, it may need to be customized to do so. This year, plan administrators nationwide are fielding employee questions about rollovers to Roth IRAs.

401(k) plan participants need to make sure the plan permits this. An employee should request a copy of the SPD. If you ask and no one seems to know where it is, then call the toll-free number on your monthly 401(k) statement and ask a live person if in-service, non-hardship withdrawal distributions are an option. In some 401(k)s, an in-service non-hardship withdrawal will prevent you from further participation; be sure to check on that.

If this is permissible and you want to make the move, you better make an IRA rollover with the assets withdrawn. If you don’t, that distribution out of your qualified retirement plan will be slapped with a 20% federal withholding tax and federal and state income taxes. Oh yes, you will also incur the 10% early withdrawal penalty if you are younger than age 59½. Additionally, if you have taken a loan from your 401(k), any in-service withdrawal might cause it to be characterized as a taxable distribution in the eyes of the IRS.

Obviously, this IRA rollover possibility is not a big hit with the national and regional retirement plan providers, who would like to see you keep participating in their 401(k) programs rather than partly or fully bail out. But many employees would like a broader and more diverse range of investment options – and some would like the chance to direct their money into vehicles designed to produce future income streams.

Don’t forget to talk to the professionals. Retirement plan administrators and participants should talk to the financial consultant that has helped them with their 401(k) program before making a move. This article is simply an overview, and there will be different details to attend to with each employee. So be sure to touch base with the financial professional you trust.

Other articles to consider:

5 Reasons Your 401k is a Bad Investment

401k Fees: See what you’re really paying

Are there too many hands in the cookie jar?

There are five major problems with tax-deferred plans at work, whether you have a 401(k), 403(b) or another plan at work.  Here are 5 reasons your plan may be a bad investment:

1st Problem: Limited Choices.

For most, this provides two challenges: the limited ability to screen your investments for moral or social issues important to you and the limited ability to find the best investment vehicles (place to get the highest potential return).

2nd Problem: No personal relevance.

When you simply select funds from a plan at work, there is no personal meaning or connection to your life. You are handing your money over to someone else who does not know you or anything about your situation. Your faith is in the hands of a money manager or team of managers and fully out of your control. Why do you think so many people stop contributing to a 401(k) when the markets are going down? If instead your investments had relevance to your life and were in full alignment with your faith, values, belief, and mission in life don’t you think you would continue investing?

3rd Problem: High Fees.

Most retirement plan fees are hidden beneath layers and layers of costs assumed by mutual funds. There are the widely publicized expenses reflected in the prospectus of the mutual fund listed under the expense ratio. But there are also broker fees, trading costs, commissions, and other fees that you can find only in what is called the Statement of Additional Information (SAI). These additional expenses are difficult to determine, but a 2007 analysis by Virginia Tech, the University of Virginia, and Boston College revealed that the average SAI charge is 1.44 percent per year. This is in addition to the 1.56 percent charged by the average Annual Expense Ratio. In other words, the total charge of the average mutual fund is 3.00 percent per year.

4th Problem: Ticking Tax Time Bomb.

Make no mistake about it. The government knows how to generate future tax revenue at your expense. They do this by allowing you to take tax breaks today in exchange for much larger tax bills in the future. Many people just look at the tax benefits of tax deferral and neglect to factor in that what used to be a $5,000 tax write-off is now a tax bill for tens or even hundreds of thousands of dollars. Uncle Sam is no fool. He’s figured out how to entice you into funding his future spending.

5th Problem: Lack of Liquidity and Accessibility.

If you need access to your funds prior to age 59 1/2, your retirement plan generally will have a 10% penalty and you may also owe federal and state taxes. Often a withdrawal from a retirement account can cost you 40% of more. That means every $10,000 would lose $4,000 in taxes and penalties…that’s not what you can easily accessible. Of course there are exceptions to the rule, but in most cases, your retirement plan at work is very inflexible and costly if you need to access the funds.

Also SEE:

401ks: see what you’re really paying

Is Nationwide on your Side?

Sorting out Retirement Solutions for the Small Business Owner

Five retirement plans you may want to consider

Many times people come into my office looking for advice on how to appropriately plan their financial future. Asset location is often just as important as asset allocation. While asset allocation looks to spread your assets among many different assets classes, asset location helps you spread your assets among taxable, tax-deferred, and potentially tax-free accounts. Many who are employed by a corporation have retirement planning options at work, but what about the business owner? How do you choose the best location for your assets and that of your employees? Click here to read more »

Why Financial Lies Destroy Wealth

When it comes to investing, most people who lose in investing do so, not because of ability, knowledge, or skills, but rather due to a series of poor decisions, bad advice, and critical mistakes. Many of which were completely avoidable! I have seen so many people take big losses, pay exorbitant fees, pay too much in taxes, and buy and sell at the worst possible time.

If you have been unsuccessful at investing, chances are it’s not completely your fault. Don’t hear me wrong! I am a huge fan of personal responsibility and accountability. However, with bad advice being the norm, it is very difficult for the average investor to cut through the noise, to discern fact from fallacy, and make the correct choices. Click here to read more »

Why trying to beat the stock market is a poor goal.

Many people place too much importance on trying to beat the stock market. How much of our society compares everything about investing to the Standard & Poor’s 500 index? When you beat the market you’re happy and sad when you underperform. Why is this? Are your goals really tied to the stock market? This perspective is flawed from the beginning. For example, would you have been happy at the end of 2008 if your investment accounts were down 35%? The market, as indicated by the S&P 500, was down 38.5%. You beat the market by 3 1/2%! Somehow, I don’t think you or your spouse would think this was great news. That is why “beating the market” should not be your goal. Click here to read more »

What would you like to have known at 18, 25, or 35?

When you were 20 or 25, what was your level of financial literacy? What did you think of when the nightly news mentioned Wall Street or the Federal Reserve? Did you even care about those things at that time?

Few young adults fully understand how wealth can be built. That’s a shame. Decades from now, many will wish they had started planning to amass wealth earlier in life. How can you encourage your children to start that process? Click here to read more »

Are you letting life sidetrack your financial future?

Are you stuck in reverse?

On the journey of life, there are many things that can quickly detour or sidetrack us. There are often financial barriers that create obstacles in our lives. They can sometimes be a tiny pothole in the road, possibly a quick pit stop, a small detour, or even a large roadblock.

I remember one time I took a long trip from New Hampshire to Pennsylvania for a wedding. I had the route mapped out perfectly. I knew the exact number of miles, the length of time it was expected to take down to the minute. I had a list of freeways to avoid and left at the most opportune time – after the morning rush hour spree. My goal was to make it to New York before evening rush hour and coast right into the Philadelphia area. Click here to read more »

A New Tool at Values First Advisors

Is your financial life in shambles?

You may think, “I cannot succeed financially; there are too many obstacles.” You may not be able to succeed on your own, but with God by your side, anything is possible. He can make things happen that seem impossible. He can open doors that you never thought could be opened. Do you have faith that the Creator of life can supernaturally turn your financial life around? He can make a way for you even when the odds are stacked against you and there appears to be no way. Don’t see God as a small-sized God but rather a God who can help you accomplish anything. Click here to read more »

Do you own a small business with a few employees? Are you self-employed? In either case, the SEP IRA may be the ideal low-cost, easily administered retirement savings plan for you.
This is a simple pension plan using a traditional IRA. (SEP stands for Simplified Employee Pension.) It lets you put aside money into individual IRAs for you and your employees, with lower administrative fees and less paperwork than other types of retirement plans.

Tax-deferred compounding of pre-tax dollars

You contribute pre-tax dollars to a SEP IRA, and that has the effect of lowering your tax bill. The money in the IRA grows tax-deferred, and your business doesn’t pay any taxes on the IRA earnings.1 The assets can be invested in many ways.

The traditional IRA rules apply. When you take the money out of a SEP IRA for retirement, you pay ordinary income taxes on it. (Should you withdraw SEP IRA assets before age 59½, you’ll likely be assessed a penalty, with some exceptions.) Click here to read more »