As you near retirement, it’s important to evaluate and reduce your stock market risk – because your accounts might not have enough time to recover from a downturn right before you retire. An in-service distribution can help you protect a portion of your retirement savings.
How do In-Service Distributions work?
These allow employees under age 59.5 who are still working to directly transfer (roll over) part of their employer-sponsored retirement plan (think 401(k)s, 403(b)s, 457s, pensions and profit-sharing plans) to an IRA or IRA annuity without incurring the typical 10% early withdrawal penalty.
Not all employer-sponsored plans allow in-service distributions, so you’ll need to check with your plan administrator before you move forward.
Can they be taxed?
Money taken from your qualified retirement plan will not trigger taxation as long as you directly transfer it to an IRA or IRA annuity within 60 days; it won’t be taxed until you begin withdrawing money from the annuity. If you don’t transfer it within 60 days, it becomes withdrawn and incurs the 10% early withdrawal penalty as well as taxation as ordinary income.
Why choose an In-service Distribution?
Rolling part of your employer-sponsored retirement plan into a fixed or fixed indexed annuity protects that portion of your savings from loss due to market volatility. The money still grows, either by a fixed interest rate or index performance, and you can use the annuity to set up a guaranteed stream of lifetime income.
How do In-Service Withdrawals work?
An in-service withdrawal allows still-working employees aged 59.5 and older to take money for personal use from their employer-sponsored retirement plan. The withdrawal must meet certain requirements depending on whether it is made from an employer contribution or employee contribution.
Requirements can include:
- Reaching age 59 ½
- Reaching a fixed number of years after the contributions
- Experiencing certain events, like illness or disability
Not all employer-sponsored plans allow in-service withdrawals, so you’ll need to check with your plan administrator before you move forward.
Can they be taxed?
They are taxed as ordinary income if the employee is age 59.5 or older.
Why choose an In-Service Withdrawal?
Having access to your retirement account funds prior to leaving your job – or in the case of financial hardship – can give you more control over and opportunities to diversify your savings.
Published 03.01.2022
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