The In-Service Distribution and Withdrawal

Shawn Plummer

CEO, The Annuity Expert

What is an in-service distribution? As pre-retirees get older, the amount of time before retirement and the risk of losing their retirement savings needs to be limited. This is where an in-service distribution can help protect a portion of the money before retirement.

What is In-Service Distribution?

An in-service distribution allows employees who are still working to roll over a portion of their employer-sponsored retirement plan into an IRA, including annuities. This allows a pre-retiree to protect some of their retirement savings from stock market downturns sooner than later.

How does In-Service Distributions work?

An in-service distribution allows employees who are still working to directly transfer, tax-free, a portion of their vested balance from an employer-sponsored retirement plan into an Individual Retirement Account (IRA) or IRA annuity. The employer-sponsored plan must permit an in-service distribution.

In-service distributions may be taken from 401(k), 403(b), 457 plans, pensions, and profit-sharing plans. The money taken from the qualified retirement plans will not trigger a taxable event as long as the distribution is directly transferred or “rolled over” to an IRA or IRA annuity. The money won’t be taxed until the owner begins to withdraw money from the annuity.

An in-service distribution allows a transfer from a 401k to an IRA before age 59.5 while still employed without early withdrawal penalties.

If an employee does not directly transfer the distribution into an IRA or IRA annuity within 60 days, the distribution will become withdrawn. If the employee is younger than 59.5, the withdrawal will incur a 10% early withdrawal penalty and be taxed as ordinary income.

Why In-Service Distribution into an annuity?

The money in a fixed or fixed index annuity is not exposed to stock market volatility which means the annuity eliminates the risk. Annuity owners can still grow their IRA either by a fixed interest rate or index performance. The pre-retiree can also choose to set up a future guaranteed stream of income today as well.

What is a good age for an In-Service Distribution?

Starting at age 50 or later is a proper time for an in-service distribution simply because the official retirement age per the IRS is age 59.5. This allows up to 9.5 years to protect a portion of the retirement savings and reduce the risk of stock market loss.

What is an In-Service Withdrawal?

An In-Service Withdrawal withdrawal is taken for personal use from an employer-sponsored retirement plan like a 401k while still employed and age 59.5 or older. Not all employer-sponsored plans allow in-service withdrawals.

If permitted, the withdrawal must meet certain requirements depending on whether the withdrawal comes from an employer contribution or employee contribution. Such factors can include:

In-service withdrawals will be taxed as ordinary income as long as the employee is age 59.5 or older.

The Benefits of In-Service Distributions and Withdrawals

The main benefit for both in-service distributions and withdrawals is diversifying retirement savings beyond the employer-sponsored plan and protecting a portion of the employee’s nest egg.

Never put all your eggs in one basket.

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Conclusion

The closer you get to retirement age, the less stock market risk needs to be taken.

An in-service distribution (if allowed) provides the ability to transfer a portion of an employer-sponsored retirement plan to an IRA while still employed. This includes annuities.

A fixed or fixed index annuity will allow pre-retirees to protect and grow an IRA safely and tax-deferred leading up to the desired retirement start date.

If you’re interested in an in-service distribution, check with your Third-Party Administrator (TPA) or Human Resources Department.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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