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Taking an in-service withdrawal

Posted by Andrew Chan  February 9, 2009 09:45 AM

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I have a company sponsored 401K with 80+% in my company stock through Fidelity. The plan is "frozen", no contributions and no match because my company was sold to another company. I am about 3 years away from retirement. How can I diversify? Within the plan, I have about 8 Fidelity choices. If I make an "in-service withdrawal" and open another Fidelity account I will have many more choices. How can I get unbiased advice?

While I don’t know how much of your total assets are represented by your 401(k) account, in general, having 80+ percent of your 401(k) account in one company’s stock seems very high. Given that, I think you are definitely doing the right thing to try to further diversify your portfolio.

It is difficult is say how well diversified your 401(k) account can be with only 8 mutual funds to choose from without knowing which funds they are but again, generally, the more funds you have to choose from the better. I usually like to be able to choose from a pool of 20 to 40 funds from a broad selection of asset classes. Opening an IRA account at a large mutual fund custodian that offers thousands of funds from all asset classes is a good start towards diversification. However, you will want to make sure that you are able to rollover your 401(k) account rather than withdrawing it. If done properly, rolling it over to an IRA should be a non-taxable event. Withdrawing your 401(k) balance, on the other hand, will likely be considered a taxable distribution. You should talk to your employer/plan administrator to fully understand how the funds will come out of your 401(k) and the taxability of those funds.

In addition to clarifying the how the funds can be withdrawn, you should also ask your employer/plan administrator what, if any, limitations apply while plan is frozen. Some plans may not allow in-service withdrawals during this period. In fact, there are usually a limited number of things that you can do to your account while it is frozen.

If you are allowed to take an in-service withdrawal and roll it over to an IRA account without any tax penalties your investment options should increase. If you are not comfortable deciding on the investments to choose to create a diversified portfolio you should consult with a financial planner who can provide you with some guidance.

To find a financial advisor who will provide you with unbiased advice, I recommend you start with someone who is a Certified Financial Planner (CFP certificant). CFP certificants have to satisfy a rigorous set of educational, professional, and ethics requirements to earn and maintain their CFP designation. In addition, CFP certificants have a fiduciary responsibility to always put the interests of their clients ahead of their own.

Once you’ve identified an advisor who is a CFP certificant, you should interview them about their qualifications, experience and any potential conflicts of interests that they may have if you decide to work together. One obvious area that may lead to potential conflicts of interest involve how the advisor is compensated. Be sure to understand how the advisor’s compensation will or will not be effected if you carry out the recommendations they have made for you. Be sure that you understand these potential conflicts before deciding to work with a particular advisor.

For more information about working with an advisor, visit the following non-profit and professional association web sites.

- CFP Board: http://www.cfp.net/learn/

- National Association of Personal Financial Advisors (NAPFA): http://www.napfa.org/consumer/index.asp

- Financial Planning Association (FPA): http://www.fpaforfinancialplanning.org/

This blog is not written or edited by Boston.com or the Boston Globe.
The author is solely responsible for the content.

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ABOUT MANAGING YOUR MONEY
Local finance professionals share insights and advice on issues such as budgeting, managing debt, and retirement planning.

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D. Abraham Ringer is a CERTIFIED FINANCIAL PLANNER practitioner and a Financial Adviser with Morgan Stanley Global Wealth Management in Boston. He is registered in MA, NH, NY and several other states to which his articles are directed. For more information please visit www.morganstanleyfa.com/ringer
Financial Planning Association™ of Massachusetts has 900 members who specialize in the financial planning process. Many of its members engage in philanthropic pro bono work in their communities, recommend legislation, elevate public awareness, promote financial literacy, and advocate for sound economic and tax policies.
Odysseas Papadimitriou is the founder of CardHub.com, a credit card and gift card marketplace, and WalletHub.com, a personal finance site. He has more than 13 years of experience in the personal finance industry, and previously served as senior director at Capital One.

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