In-Service Withdrawals from 401(k) Plans – The Basics

Of all the retirement tools available, 401(k)s are among the most popular. Offered primarily through one’s employer, 401(k)s offer a secure way to invest in the future through your employer prior to taxes. Flexible and convenient, millions of Americans rely on this investment option to plan for whatever the future may bring.

Despite their utility, 401(k)s aren’t always ideal. The investment structure can be limiting, company options are often lackluster, and fees may be outlandish. Upon termination from a company, most people make the choice to rollover their accounts immediately, whether into an IRA or into a new employer’s retirement plan. For many, this is the only way to remove cash from a 401(k), or so they think. What a lot of people don’t know is that some employers permit in-service withdrawals from an account without job termination, hardship, or retirement.

 

In-Service, Non-Hardship Employee Withdrawals from 401(k)s Defined

Instead of waiting to leave a job or retiring, some companies permit employees to roll 401(k) contributions, or contributions to profit sharing or employee stock plans, over into an IRA. Provided that all requirements are met, in-service withdrawals can be performed without hardship or retirement requirements.

An early withdrawal doesn’t mean that this money can be used for any purpose, however; tax rules for retirement still apply. Instead, this permits employees to invest their money on their own time and in the way that is most appropriate for one’s individual circumstances. Although this does not necessarily guarantee increased growth or future profits, it can increase the likelihood of additional benefits based on your strategy or your personal investment advisor’s approach.

The Ins and Outs of In-Service Withdrawals

So, why would you want to rollover your 401(k) early? There can be many advantages to in-service withdrawals, including increased investment options, reduced fees, and greater freedom for future planning. Employee retirement plans often have strict restrictions, all of which can be avoided through in-service withdrawals.

In-service withdrawals are not without boundaries, unfortunately, making it critical that you contact your plan administrator prior to making any decisions. Rolling your plan over into a different retirement account may be limited by plan guidelines and federal regulations, including age limits and service requirements. For example, many plans require participants to be at least 59 and a half in order to qualify for withdrawal. Individuals under the minimum age may be subject to a 10% early withdrawal tax penalty, and some companies bar distributions from employees who have not been with the company for a certain amount of time, such as five years. Further, some plan policies only permit withdrawal for self-contributed assets, or cash contributions. Some may even require spousal approval, making it vital that you have a solid plan in place before making any plan decisions.

What Rules and Issues May Pertain to In-Service Withdrawals?

Like most investment options, nothing is guaranteed. Different companies impose restrictions on what assets can be rolled over, such as after-tax contributions or company match contributions. Others may impose penalties on a withdrawal, either in place of or in addition to age requirements for standard retirement plans. Asset liquidation, especially in the case of annuities or company-specific holdings, may also resort in penalties or loss of protection from creditors.

In addition to penalties on withdrawals, rolling over pre-tax contributions can potentially lead to taxable consequences. Before moving assets, be aware of the potential consequences you may face, both upon withdrawal as well as upon access in retirement.

So You’ve Decided on an In-Service Withdrawal – Now What?

Making the decision to approach an in-service withdrawal can be an excellent move in your retirement planning, but should not be approached without discussion with your plan administrator. Prior to initiating a rollover, be sure to cover all applicable topics, including:

• Are in-service withdrawals a possibility for my 401(k)?
• What assets are eligible for withdrawal?
• How much of your investment is eligible for withdrawal?
• Is there a penalty?
• Are there any restrictions on age?
• What are the possible taxable consequences?
• Do any processing requirements or distribution timelines apply?

Making the Right Choices for Your Retirement

Planning for retirement is never easy, and it’s even harder when your company’s 401(k) plan limits your options or imposes unnecessary fees. For many individuals nearing the age of retirement, in-service withdrawals are among the most effective ways to diversify your savings and increase control over your future. Available to those meeting age limits and company requirements, this unique process provides individuals with the ability to make the most of the path to retirement.

If you are prepared for the potential penalties, both taxable and otherwise, taking an in-service withdrawal can be an amazing way to increase return potential and prepare for everything retirement has to offer. Although no financial plan is guaranteed to be a success, taking the chance and rolling over your assets may be amazingly beneficial down the road.

Disclosure: For informational and educational purposes only. The information contained herein may contain information that is subject to change without notice. Any investments or strategies referenced herein do not take into account the investment objectives, financial situation or particular needs of any specific person. Product suitability must be independently determined for each individual investor.

DeWitt & Dunn does not provide tax/legal advice. Please consult with the appropriate professional.