Do you know that you can pull funds from your 401k before you retire? With the recent market volatility, many Lockheed employees are looking at in-service withdrawals an option to take some of the timing risk out of their retirement nest eggs. The in-service withdrawal is an option for Lockheed 401k participants looking to access funds in their 401k while they are still working.

What is an in-service withdrawal?

An in-service withdrawal is a feature of some 401k plans that allows you to roll money out of the plan while you are still working for the company.

One option is rolling over these funds to a traditional IRA. You want to make sure to work with your tax professional and financial advisor to discuss if this is the best option for you before pulling the trigger.

Lockheed employees can do an in-service withdrawal once every six months. The funds can be taken from a number of different buckets depending on how long you’ve been at Lockheed and how the funds are invested (pre-tax or after-tax).

Who can take an in-service withdrawal?

Anyone that is still working and is 59 and a half years of age or older can take a withdrawal from the plan.

What are the possible benefits of taking an in-service withdrawal?

  • Investment flexibility. There are limited options available to you to invest inside your 401k plan. If you rolled out a portion of your 401k into a traditional IRA, you could possibly have more investment options, including cash, CDs, individual stocks, bonds etc. to invest in.
  • Control over your assets. If you roll assets over to a traditional IRA, you don’t have to worry about the plan at work changing investment options or providers (like the change from Voya to Empower a few years back) and requiring you to make changes to your 401k. You can direct the IRA yourself or hire a financial advisor to help.

What are the drawbacks of taking an in-service withdrawal?

  • Fees. Depending on where you roll those 401k funds over to, the fee you pay inside a traditional IRA could be more expensive than the costs of your 401k. Make sure you know exactly what fees you’ll pay in the IRA before you decide to roll assets out of your 401k.
  • Retiring Early? If you are planning on retiring before age 59.5, leaving the funds inside the 401k might be better for you. The 401k allows you to take funds out after you hit 55 if you no longer work at the company. If you roll funds out of the plan to a traditional IRA, you could be taxed and penalized for removing funds from that IRA before age 59.5.
  • Can’t use NUA. If you’d like to take advantage of net unrealized appreciation (find out more about NUA by clicking HERE) then that won’t be available to you if you do an in-service withdrawal.

What’s the process to do an in-service withdrawal?

You’ll want to work with your tax professional and financial advisor to make sure it’s the right option for you. Once you decide that you’d like to do an in-service withdrawal, then you will need to contact Empower to talk through your options. They will walk you through the process and ask you where you’d like the funds sent.

Other ways to access your funds while working

There are a couple of additional ways you can access funds in your retirement plan while you are still working. These options however are usually used as a last option and can have adverse tax consequences. Like any other big financial decision, it’s a good idea to bring in your tax professional and financial advisor to make sure the move is the right one for you.

Hardship Withdrawal

A hardship withdrawal might be an option for you to remove assets from your retirement plan at Lockheed. It’s a little more difficult to qualify as you must meet certain conditions that show “heavy and immediate” financial needs. These type of withdrawals are usually used as a “last resort” for clients that are in the middle of a financial issue.

  • Pros – can satisfy a quick need for emergency cash if approved; don’t have to be 59.5 to access.
  • Cons – removing retirement funds means long term goals might be more difficult; also have to jump through a few hoops to qualify

Loans

A 401k loan might also be an option to access funds from your retirement plan. The loan is then repaid over a period of time from each paycheck.

  • Pros – quick access to funds
  • Cons – loan is repaid with after-tax dollars, which means you are essentially paying taxes twice on those funds (from each paycheck and again when you pull the funds out in retirement) so – make sure your CPA or tax professional is aware of your situation. Also, if you change jobs while you are still paying off the loan, you are responsible for paying back that loan before moving your Lockheed 401k to your IRA or new 401k.

If you’d like a 100% free, no-obligation analysis to see if one of these options is the the right path for you, shoot me an email at Brian@TheAeroAdvisor.com and I would be glad to help.