401(k) in-service withdrawals: More flexibility for your retirement savings

In general, the 401(k) system of automatic contributions, preset investment options, and employer matching creates a simple retirement savings system. But if you’re over 59 ½ with an employer-sponsored 401(k), you have another option: an in-service withdrawal.

IRS guidelines allow in-service withdrawals for individuals age 59 ½ and older; if their employer plan allows it, the plan can distribute a portion of their 401(k) assets into a rollover IRA or other qualified savings vehicle like an annuity – without taxation or typical early-withdrawal penalties.

Working with a knowledgeable financial advisor can help you determine if an in-service withdrawal is a right choice for you. Here are answers to some of the most frequently asked questions on the process.

Why should I take money from my 401(k)?

This lesser-known strategy could free your retirement savings from a rigid company plan structure and give you and your financial planner more control over your customized retirement portfolio. IRAs can hold individual bonds, ETFs, and many mutual funds accessible through an advisor. Additionally, with an IRA you can access stocks, non-traded REITs, and other alternative investments – in other words, you have the opportunity for a more robust, well-balanced retirement portfolio.

Isn’t it cheaper to leave assets in my employer plan until I retire?

A company plan may actually cost more than a professionally-managed portfolio when you factor in administrative fees and recordkeeping services. Investment advisors do charge a management fee, but this cost provides you custom investment advice and due diligence without conflicts of interest or commission motives. And your company plan doesn’t come with the further advantage of a financial advisor with a legal duty to put your (and only your) best interests first.

What about penalties and taxes?

If you are 59 ½ or older and transfer the money you withdraw into a tax-deferred account within 60 days of receiving it, there are no taxes or early distribution penalties on in-service withdrawals.

Will I lose my company match?

As long as you still work for the company, your savings match will continue. It’s based on your contributions rather than account values, so while you keep making those contributions, an in-service withdrawal won’t affect your match benefit.

Can I still borrow against my account?

Yes, but after you take the in-service withdrawal, your account will have a lower value, so your borrowing ability will be decreased. Keep in mind that generally, you cannot borrow money from either a traditional or Roth IRA.

Note: Financial advisors typically do not recommend borrowing against your 401(k). Consider other loan sources before you do so, as loans may negatively affect your account earnings and reduce the money you eventually have available for retirement.

The takeaway

An in-service withdrawal from your 401(k) retirement account can give you additional investment options apart from the limited menu that may be offered by your employer plan. You and your financial advisor can exert more control over your retirement strategy, and if you are at least 59 ½ years of age or older, these withdrawals are exempt from taxes and early withdrawal penalties.

Need help deciding if an in-service withdrawal would work for you? Contact Bill Constain, Freedom Wealth Advisors, at 904-373-8349 today for a free, no-obligation consultation and get answers to these and other financial and retirement questions.

Published 11.04.2021


Got a question or comment? You can reach us at bill@freedomwealthservices.com or call us at 904-373-8349

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