Imagine how you would feel being on a sinking cruise ship if you couldn’t get off because there weren’t any life jackets or back up boats. If you were facing this potential problem, when would you want to know? Well if you own a 401(k) plan, this could happen if your plan gets frozen in what is called a blackout period and the market tanks. A blackout occurs when a company decides to make changes to the record keeper and participants are locked out of making changes to their plan. Yet, many people with a 401(k) plan can avoid this potential trap using a little known safety boat called an In Service Withdrawal under The Pension Protection Act.

Here is how to use this act to your advantage. First, determine if your company retirement plan offers in-service withdrawals if you are still employed. Most plans do for people over the age 59 1/2 or for your workers if they meet certain requirements. If this is possible, consider rolling over this money to a self directed IRA. For those who have lost their job, but haven’t decided what to do with their 401(k) plan, they also can do a rollover to an IRA. This will give the account owner control over how this money is invested and avoid a possible blackout.

Potential tax savings is another reason to consider an in-service withdrawal to an IRA beyond the potential blackout. The problem is the government continues to spend money like a credit card with no preset spending limit. In the last few days they rolled out another spending spree actually buying cars taking them to the junk yard and smashing them like a 4 year old throwing a temper tantrum. One day the bill for all of this spending will have to be paid. Most likely this bill will be paid by the government raising taxes on all of us.
The Pension Protection Act also allows eligible investors the ability to transfer the 401(k) withdrawal directly to a Roth IRA potentially saving thousands in taxes. The money transferred to the Roth IRA would be taxable now instead of later. If the investment balance is lower today than two years ago, the taxes due could be much lower now than waiting till the stock market fully recovers in the future. It can also make sense for long-term investors who feel taxes will be higher in the future. Or it can be a great option for someone who lost their job and could be in a lower tax bracket this year. A Roth IRA allows the account owner complete control over how the money is invested, instead of being limited company retirement plan choices. If an investor converted their 401(k) to a Roth IRA and held the account for at least 5 years or till age 59 1/2, whichever is longer, they would not pay taxes on any of the principal or profits.

There is also an opportunity to financially benefit from the recovery in the stock market using the Pension Protection Act. The stock market hit bottom back in March of this year and since then has been recovering in price. In the next few months, the stock market will still probably be a roller coaster ride, going up and down a lot. Yet, we feel over the long-term the stock market will go back up in price. So it is a good time to review what is owned in investment accounts and how to build tax-free money.

Before completing the process of transferring your money ask the company you are considering working with if they offer multi-generational stretch accounts. That sounds technical, but basically if an account owner passes away and leaves their money to anyone beside a spouse usually all of the taxes are paid in one lump sum. Yet, certain investment companies offer a beneficiary the ability to stretch out the taxes due over their lifetime. This strategy could save a family an additional 41% in taxes.
The solution is to take some time this week to have your personal situation reviewed. Talk with an unbiased and independent Investment Professional who doesn’t work for your company sponsored plan and one who understands how the Pension Protection Act works and determine if this strategy is right for you. Review all of the options and get a plan of action in place by considering the Pension Protection Act as part of your recovery strategy. Remember the best defense is a great offense, so take action.

For more information about The Retirement Guys, tune in every Saturday at noon on 1230 WCWA and every Sunday at 11 a.m. on 1370 WSPD or visit www.retirementguysradio.com. Securities are offered through NEXT Financial Group Inc., Member FINRA / SIPC. The Retirement Guys are not an affiliate of NEXT Financial Group, Inc. The office is at 1700 Woodlands Drive, Suite 100, Maumee, OH 43537. NEXT Financial Group, Inc. nor its Representatives provide tax advice. Always consult with your tax professional.