Perhaps you have studied your 401(k) statement for the newest calendar quarter (2008:1Q)? If that’s the case, you’ve noticed a loss of about 8% – 10% if you’re average. You may already know, your 401(k) money is generally dedicated to mutual funds and mutual funds are consists of stocks and bonds. Since stock prices have been violently, and predictably, waxing and waning in recent months, so has the value of your 401(k) account. The same holds true with bonds except the drivers are not only the economy but in addition interest rates and the creditworthiness of the issuing company. During 2008:1Q the markets were mostly down and so were your 401(k) assets. To not worry, you say, because this is your retirement money and there is lots of time and energy to get over market downturns. True, unless you’re in the red zone before retirement (say age 57 or more). Did you realize that within the last major market meltdown (2000-02) the S&P index, an important barometer of the stock market, dropped 50% of it value. ERISA Bonds Those in retirement’s “red zone” were victimized with huge losses and the outcomes were: postpone retirement or scale down the planned retirement. What can you do to protect your 401(k) assets if you’re scared stiff a major market downturn will ruin your retirement?
The Employee Retirement Income Security Act of 1974 (“ERISA”) and the IRS enable you to transfer some or your entire money out of your 401(k) without stopping work, without retiring and without ending your participation in your employer’s 401(k) plan. However, your employer has the right to avoid you from transferring, or load with qualifications and restrictions, what ERISA and the IRS permit. To allow such transfers your employer must add an amendment to the master plan allowing in-service, non-hardship withdrawals (“INNHW”). This provision can be straightforward with few restrictions or it can be extremely restrictive — your employer extends to decide. Most large companies have added the amendment because recent court cases, and the bankruptcy of Enron which also resulted in massive losses of their employees 401(k) assets, have opened a Pandora’s box in regards to the fiduciary responsibility of employers to accomplish all they are able to to greatly help employees protect their retirement money in plans they sponsor. Below is what the INNHW amendment, inside most liberal form, will allow and still permit the employee to still work and continue adding to the 401(k) plan.
An employer profit sharing and matching contributions, plus hardly any money the employee used in the master plan from another qualified pension plan, and the earnings on such money, can be transferred into a self-directed IRA and neither ERISA or the IRS impose an age restriction. However, the employer has the right to stipulate that only “vested” amount might be transferred and they are able to also set a minimum age that the employee must reach before transfers can occur. They can also add other restrictions like: (a) a minimum amount of years employed; (b) limit the percentage that may be transferred; (c) cease or reduce matching contribution for a specified period adhering to a transfer; (d) limit or prevent participation in the master plan for a given period of time. In fact, the employer can add nearly every restriction they want provided the uniformly apply it across all employees. The INNHW amendment applies to all or any employees, including owners, partners and senior management.
ERISA and the IRS enable the employee contributions to be transferred without penalty and without taxes being paid after the employee reach age 591/2 years of age. Again, the employer can impose limitations and restrictions on such transfers in the ISNHW amendment. Why would anyone wish to transfer their retirement money from their 401(k) to a self-directed IRA?
The major benefit of in-service, non-hardship transfers by plan participants is the ability to protect their retirement money from the vagaries of the marketplace, reduce unsuitable risk, take advantage of anticipated changes in tax rates, and convert moneys to a Roth IRA during the income suspension window in 2010. If your participant is near retirement, they may have insufficient time and energy to get over market downturns or bolster their savings rate to create up losses. The resulting stress could easily affect their job efficiency.
It is just a foregone conclusion that the marginal tax brackets and capital gains taxes will increase once the deficit reduction tax breaks of the Bush Administration expire in 2010 and 2011. By re-positioning qualified retirement money now, it ought to be possible to control favorably the tax liabilities associated with retirement money in employer plans. The higher-income participants have the added benefit of converting all or some of their qualified retirement assets to a Roth IRA in 2010. The tax relief is likely to be a short-lived window of opportunity. By transferring moneys from employer plans to self-directed IRAs, participants have virtually unlimited investment options: domestic and foreign stocks, bonds and general securities, bank CDs and other insured accounts, annuities, real-estate, commodities, business interests, limited partnerships and more. Once the retirement money is moved outside the master plan, professional money managers can be used to meet up specific and individual investment objectives. The investment options inside most plans are not really sufficient to handle the variability of assets from lowest paid employee to business owner. Plus, the conventional plan participant receives hardly any advice on which plan options to pick and simply how much to allocate to each. Profit an IRA at the participant’s death can be added directly to the spouse’s IRA or “stretched” with a beneficiary over their remaining lifetime. Unless the employer’s plan permits spousal and beneficiary transfers at death, the lump-sum pay out could end up in substantial taxes for the beneficiary. The “stretch” option with an IRA can be quite a great estate planning tool.
The management and administrative fees associated with employer plans can be onerous. By selecting no-load, indexed and other low load options once moneys are moved outside the master plan, these fees can be substantially reduced. Since the conventional fees charged employer plans approach two percent of total assets, the reduction to zero or even a few basis points may make an important difference in performance over a long period of time. If the employer is paying the fees, fewer assets in the master plan means cost savings. There is an increasing consensus that Social Security benefits should really be postponed as long as possible to maximise lifetime benefits. Accordingly, early retirement might be financed more with plan assets and IRAs, and these should really be found in place now to prevent the expected higher income taxes starting in 2011 and beyond. This really is particularly so of moneys destined for Roth IRAs.