Diversify before your retirement with in-service distributions

Contrary to popular belief, you may not have to keep all of your retirement savings in an employer-sponsored retirement plan, such as your 401(k) plan, until you change jobs or retire. Instead, you may be allowed to take an in-service distribution and roll over a portion of your retirement assets to an IRA.¹

This may allow you to more effectively manage your retirement savings before retirement — while you continue to work and make contributions to your employer-sponsored plan. As long as you roll these assets directly into an IRA, your in-service distributions will not result in a tax penalty and mandatory tax withholding will not be applied.

Determine your eligibility first

Your ability to take in-service distributions is determined by the terms of your employer-sponsored retirement plan. The specifics of eligibility vary widely by plan — review your retirement plan documents to determine if you are indeed eligible. If you have questions, contact the plan administrator, who can help you investigate this possibility.

Consider the benefits of a rollover now, while you're still working

There may be advantages to moving a portion of your retirement assets into an IRA now rather than later.

Benefits can include:

• Control and ownership. With an IRA, you are the account owner and have more control over your assets, free from the restrictions your employer-sponsored plan can impose.
• Investment diversification. Many employer-sponsored plans offer limited investment options. In contrast, most IRAs typically provide a wider range of investment choices across virtually every asset class. This flexibility can help you better diversify your retirement assets to meet your individual investment goals.
• Beneficiary options. An IRA may allow you to designate beneficiaries in several ways, such as by naming multiple or contingent beneficiaries, restricting beneficiary payouts or naming a trust as beneficiary. Not all IRA custodians offer the same services, so it's important to understand the choices available before you roll over your assets.
• Distributions. Rolling over (converting) employer-sponsored plan assets to a Roth IRA can give you and your heirs the opportunity to receive tax-free distributions in the future. Furthermore, Roth IRA owners are not subject to Required Minimum Distribution rules (although the RMD rules do apply to non-spouse beneficiaries of Roth IRAs).

Weigh potential disadvantages before rolling over funds to an IRA

Consider potential drawbacks before deciding whether in-service distributions make sense for you:

• Age limitations. In qualified plans, the age 55 rule allows participants who stop working in the year they turn 55 or later to take distributions without the 10% IRS premature distribution penalty. In an IRA, you may not take distributions until age 59½. For this reason, if you plan to retire early, you may want to preserve penalty-free access to your retirement funds by not moving all of your 401(k) assets to an IRA before retirement.
• NUA tax treatment. If employer stock is distributed from a qualified plan "in kind," you may be able to defer income tax on any increase in the stock's fair market value while it was within the plan, and to pay this tax at long-term capital gains rates when the stock is eventually sold. But this special Net Unrealized Appreciation (NUA) tax treatment is not an option for distributions from IRAs, and unless the stock is distributed as a lump sum, an NUA treatment can only apply (if at all) to stock attributable to employee contributions. Therefore, if you hold appreciated company stock in your employer-sponsored plan, distributing or rolling over the stock in an in-service distribution eliminates any ability you may have to take advantage of NUA tax treatment.
  
  Because NUA treatment is only available for lump-sum distributions from an employer-sponsored plan, you may eliminate your right to receive NUA treatment if you take any distribution from your employer-sponsored retirement plan. And any in-service distribution may make it impossible for you to receive NUA tax treatment on shares contributed by your employer.
• After-tax dollars. Any after-tax contributions you make to a qualified plan are generally segregated and can often be distributed separately from pretax dollars. If you move after-tax money into a traditional IRA, that money becomes part of the nondeductible "basis" of the IRA and will not be separately accessible.
  
  In other words, if you roll after-tax contributions to an IRA, your subsequent IRA distributions will only receive a pro rata portion of that basis. To avoid paying tax again on your IRA basis when you take an IRA distribution, you must maintain careful records of the basis in your IRAs.
• Creditor protection. While IRAs now have federal bankruptcy protection,² other IRA creditor protection is still determined by state laws. Qualified plan assets continue to have broad federal creditor protection.
• New contributions to your plan. An in-service distribution may affect your ability to contribute to your employer-sponsored plan.
• Fees and expenses. Fees related to an IRA are disclosed in the applicable product prospectus, contract offering or other disclosure document. Typically, qualified plan participants are not charged certain fees that may apply to an IRA, such as fees for trading within the account, fees for custodial services, mutual fund loads or commissions. Investment expenses in a qualified plan may also be relatively low due to institutional pricing.

Consider withdrawal rate risk

In-service distributions, if they are not rolled over, may prematurely deplete your retirement savings and increase the risk that you outlive your assets. If you must access your savings, several key factors should be considered when you decide how quickly to withdraw your funds. These factors include your age, life expectancy, risk tolerance, and the type and amount of your investments. Periodic reviews of your retirement income strategy with your financial advisor can help you plan for and manage this risk over time.

Move your assets successfully

If your plan permits in-service distributions and you decide the benefits outweigh any potential disadvantages, seek advice from a qualified financial advisor. Then contact your 401(k) plan administrator to determine the dollar amount available to roll over, and make your rollover request. Your financial advisor can assist you with the process. If you don't have a financial advisor, contact us at (800) AMERIPRISE or find an advisor in your community.