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)

RELATED FAQS

  1. What are the Roth 401(k) withdrawal rules?

    Understand the requirements for tax-free withdrawal from a Roth 401(k) account, how early withdrawals are taxed and options ...
  2. What are the main differences between a Roth 401(k) and a 401(k)?

    Learn more about financial planning, investment options and decision making between traditional 401(k) and Roth 401(k) accounts, ...
  3. How can I start or set up a Roth 401(k)?

    Find out more about what options you have to set up a Roth 401(k).
  4. What are the benefits of an independent/individual 401(k)?

    Understand the benefits of the individual 401(k) retirement savings plan and how it differs from traditional IRA based retirement ...
RELATED TERMS
  1. Elder Care

    Elder care, sometimes called elderly care, refers to services ...
  2. Gold IRA

    Definition of Gold IRA
  3. Eligible Transfer

    An IRS-allowed movement of assets into or out of an individual ...
  4. Leveraged Benefits

    The use – by a business owner or professional practitioner – ...
  5. Peri-Retirement

    A term for the period of time leading up to actual retirement. ...
  6. MyRA

    A new tax-advantaged retirement account that President Barack ...
comments powered by Disqus
Related Articles
  1. Top Financial Frights: Emergencies & ...
    Investing Basics

    Top Financial Frights: Emergencies & ...

  2. Steps To Retiring With A Reverse Mortgage
    Retirement

    Steps To Retiring With A Reverse Mortgage

  3. When Your Job Offers An Awful Retirement ...
    Retirement

    When Your Job Offers An Awful Retirement ...

  4. Top 5 Strategies To Pay For Elder Care
    Retirement

    Top 5 Strategies To Pay For Elder Care

  5. 5 Top Alternatives To A Reverse Mortgage
    Retirement

    5 Top Alternatives To A Reverse Mortgage

Trading Center