Can I roll my 401(k) and/or IRA funds into a more liquid investment fund without penalty?

By Denise Appleby AAA
A:

Choosing your retirement plan investments requires the assistance of an expert who is able to analyze your options and to help you choose the investments that best suit your profile. The investment advisor will take into consideration your risk tolerance and how soon you plan to retire. Most employers offer investment advice free of charge to their employees. Some even extend this service to assets held outside of your retirement plan. Check with your employer regarding any investment advisory services they may provide.

Speaking in general terms, you may be able to change your IRA investment(s), or even transfer your IRA to another financial institution that offers the types of investments you prefer. Check with your financial institution regarding its policies for allowing transfers, as there are some IRA products that require a minimum investment period in order to avoid early termination charges.

The 401(k) plan is a different matter. You are able to withdraw assets from your 401(k) plan only if you experience a triggering event. For most 401(k) plans, the triggering events are the following:

  • Attaining retirement age (this is generally age 59.5, but could be either earlier or as late as age 65)
  • Termination of employment (you are no longer employed by the company that offers the 401(k) plan in question)
  • Death - in this case, your beneficiaries are allowed to distribute your assets
  • Disability - the document that governs the 401(k) plan generally provides a definition of "disability"; this may vary among plans
  • If your employer terminates the 401(k) plan and does not replace it with another qualified plan

If none of these occurs, then you cannot withdraw assets from your 401(k) plan account unless the plan allows for an in-service withdrawal. An in-service withdrawal is one that can occur before you experience a triggering event.

Some 401(k) plans limit in-service withdrawals to certain circumstances. For example, you may be allowed a withdrawal if you need the assets to pay medical expenses or your mortgage or rent. Your plan administrator will be able to explain whether your plan has these provisions and any applicable limitations.

If you experience a triggering event, you may roll your 401(k) assets to a Traditional IRA or another qualified plan.

IRA and 401(k) assets that are distributed and are not rolled to another IRA or eligible retirement plan will be subject to income tax and may also be subject to an early-withdrawal penalty.

You should consult with a competent investment professional before taking action. There is usually a cost associated with any professional consultation (unless you can get it for free from your employer), but it may be well worth it.

This question was answered by Denise Appleby
(Contact Denise)

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