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Jim Lentini: Why consider in-service withdrawal?

Posted: April 6, 2009 11:24 p.m.
Updated: April 7, 2009 4:55 a.m.
Most investment options offered by company-sponsored retirement plans are designated for the accumulation phase of retirement, and not the income phase.

As you approach the retirement "Red Zone" (five years before and first five years of retirement), it is essential to understand the challenges of managing your savings in retirement, including how early losses can undermine your long-term planning.

Many employer-sponsored qualified plans allow for in-service, non-hardship withdrawals. It is not necessary to retire or separate from service to begin developing a retirement income plan. If you are in your 50s or 60s, you may wish to consider an in-service withdrawal for the following reasons:

n You are in the retirement red zone and want to protect your employer-sponsored savings plan.

n You wish to maximize the potential value of contributing to your 401(k) between now and age 70½, when you must begin taking required minimum distributions (RMDs).

n You desire to guarantee an income for life and the protection of optional benefits for you and your spouse.

There are a number of advantages for in-service withdrawals:

Control: With an IRA rollover, you can access the funds at any time, without the restrictions of the employer plan.

Flexibility: IRAs typically provide a wider range of investment choices across virtually every asset class.

Aggregation: Combining all the retirement assets in a single account facilitates a comprehensive plan for the investment of those assets.

Beneficiary Options: IRAs allow non-spouse beneficiaries to "stretch" an inherited IRA, taking payments (and deferring taxes) over their lifetimes. (For plan years beginning after 2009, plans are required to allow beneficiaries to rollover funds to an inherited IRA).

The last point, and probably the most important, is protection. The investment options, as noted above, in most employer plans are designed for the accumulation phase.

Rolling funds to an IRA can enable you to choose funding vehicles that offer downside protection for income purposes and guarantee lifetime income.

IRA assets invested in a variable annuity, which offers optional living benefits, provide a guarantee of lifetime retirement income, with potential for income increases (but not decreases) based on market performance.

A variable annuity guarantees the principal, guarantees deferred growth until retirement, and guarantees a lifetime income option for both you and your spouse.

Jim Lentini is president of Lentini Insurance & Investments Inc. He can be reached at (661) 254-7633.


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