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The “In-Service Withdrawal”

A little-known retirement planning opportunity

You may have amassed a sizable sum of money in your employer's 401(k), and that's great: It's essential to save early and often for the future. But your workplace retirement plan may lack some key features, such as a broad menu of investments or the flexibility needed to create and control a well-diversified nest egg.

Many people don't realize that in-service distributions from work plans like their 401(k) or 403(b)’s are an option.

New disclosure rules for 401(k)’s mean that employees now have more information than ever about their work-based retirement plans. With that new information, some will look at the plan they have at work and wonder if they could be doing something better with their money. Most people believe that they have to leave their money in their 401(k) until you retire or move to a different employer. But many plans allow for an in-service distribution. The question is, is such a move a good idea for you?

So what is an In-Service Distribution?

An “In-Service Distribution” simply involves moving your 401(k) money to a different plan (like an IRA) while still working and contributing to your current work based 401(k) plan. In-service distributions are unique, however, in that Employers decide whether to allow in-service distributions from their retirement plans, so first check with your plan administrator to find out if it's an option and whether or not there are any restrictions. Plans often limit in-service distributions to employees age 59 ½ or older, although some do offer them to younger workers. Your employer plan may restrict the percentage of your account balance that can be rolled over, or the number of times or frequency that you can roll it.

Why do one?

In-service distributions are usually done for a few reasons:

  • Control: Who doesn’t like control? 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.

  • Diversification: A key reason to consider an in-service distribution is that it may give you greater control over how you invest your retirement savings. Many workplace retirement plans offer fewer than 30 investment options and don’t include alternative investment choices that can help you better diversify your portfolio. Rolling some of your workplace savings to an IRA may let you access a wider menu of investments, including real estate investment trusts (REITs), municipal bonds and specialized mutual funds. This flexibility can help you better diversify your retirement assets to meet your individual investment goals

  • Roth Conversions: You may be able to convert some of your retirement savings to a Roth IRA before you retire. Unlike most 401(k)'s and traditional IRAs, Roth’s provide tax-free growth and withdrawals. You pay taxes on the money today, so you don't have to worry about future tax-rate increases. Roth IRA’s do not require any withdrawals during your lifetime, making them valuable tools for passing along wealth to future generations.Beneficiary options: Typically, IRAs allow non-spouse beneficiaries to “stretch” an inherited IRA over their lifetimes. This type of beneficiary distribution option is not available in most employer-sponsored plans, which may limit distribution choices for your beneficiaries.


Potential disadvantages

Despite the benefits of taking in-service distributions, there are possible drawbacks to consider. These include:

  • Some employers limit how much employees can contribute to the workplace plan after making an in-service distribution.

  • You might run into complications if mingling after-tax contributions with pre-tax contributions during the rollover.

  • If you roll the distribution into an IRA incorrectly, you can incur penalties and the federal income tax withholding required on regular distributions.

Proceed carefully

Keep in mind that even though diversifying your retirement account while you're still working can be a smart move, in-service distributions aren't for everyone. It's important to weigh the decision carefully with your advisor before initiating any distributions. Your advisor can also help you make sure an in-service distribution doesn't trigger early-withdrawal penalties and taxes.

Conclusions & Next Steps

We hope that you’ve found this guide informative and educational. If there’s one thing we hope you take with you, it’s that we want you to begin taking control of your financial future.

We also want to offer ourselves as a resource to you and your family. We are happy to answer questions about your current financial situation and future goals and we offer complimentary consultations at any time. Should you have any questions about what you’ve read and what it means for your future, please reach out to us. We would be delighted to be of service.


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