Is an In Service Distribution Right for You?

August 30, 2016 | by James Behr Jr & Christopher Paleologus

We have long understood that the investment choices inside of 401(k) plans certainly have a lot of room for improvement. The fees are high, investment choices are slim, and the options for how and when to invest are limited. For those who are unhappy with their current retirement plan there may be another option for you. The in service distribution option allows certain plan participants to receive some or all of their retirement assets while they are still employed, and many are eligible to be rolled into an IRA or other qualified plan.

By choosing to roll over funds from a 401(k) to an IRA, you are giving yourself the power to choose what assets go into your retirement fund.  This gives you significantly more investment choices and allows you to customize your retirement income plan. This will also afford you the option to “stretch” your IRA over your beneficiaries lifetime; an option not available in most employer-sponsored plans. Moreover, in service distributions are not just limited to a 401(k); it can also be used with a 403(b)s, 457s, and pensions.

Participants should be aware of several potential drawbacks with an in service distribution. These include losing the ability to delay minimum distributions beyond 70½, potentially less protection from creditors, and in most cases not being able to withdraw money before age 59½ without incurring a 10% distribution penalty tax. Usually, the participant must be at least age 59 ½ or have had a length of service of at least two years or more. Some plans may require both guidelines to be met. Employer-sponsored retirement plans often limit these withdrawals to vested employer matching contributions, plus earnings, as well as rollovers and earnings from previous employer plans. Many plans require spousal consent for in-service withdrawals. Because each employer-sponsored retirement plan is different, you should ask your employer about any eligibility questions concerning you or your assets.


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