What Is In-Service Withdrawal for 401(k) Plans?

You might be able to transfer a portion of your 401(k) to an individual retirement account (IRA) while still employed. This is known as an in-service withdrawal. While in-service withdrawals can offer more flexibility, they may also trigger taxes or penalties. Here is what you need to know and how in-service withdrawals work.

A financial advisor who serves your area can help you review your retirement goals and develop a financial plan based on your circumstances.

What Is an In-Service Withdrawal?

An in-service withdrawal is a withdrawal from a qualified employer-sponsored retirement plan while an employee is still working. A 401(k) is a common example, though other qualified plans may also permit in-service withdrawals, including a 403(b).

An in-service withdrawal may be possible at any time. But there might be penalties if the right conditions are not met. Generally, you must be at least age 59 ½ or have a qualifying hardship that the IRS deems an immediate and heavy financial need.

How In-Service Withdrawals Work

SmartAsset: What is in-service withdrawal for 401(k) plans?

How in-service withdrawals work depends in part on the reason for the withdrawal. For example, it may be used to cover a qualifying hardship, such as medical expenses. Alternatively, you might make an in-service withdrawal because you aren’t satisfied with your employer’s investment options and prefer to manage your own investments.

If you have a qualifying financial need, you can take a distribution from the plan and use the money to cover your expenses. Or, if you prefer to manage your own investments, you can make a rollover from your 401(k) to an IRA. However, your employer might have specific conditions under which a rollover is permitted. So check with your benefits office first if you are considering this option.

Financial Hardship Distributions

An in-service withdrawal is normally permitted without penalties. If you are at least 59 ½. However, the IRS has laid out several scenarios where an in-service distribution might be possible sooner. According to the IRS, distributions can be made before age 59 ½ to cover the following:

Expenses for medical care incurred by the employee, the employee’s spouse or any dependents of the employee or necessary for these persons to obtain medical care
Costs directly related to the purchase of a principal residence for the employee (excluding mortgage payments)
Payment of tuition, related educational fees and room and board expenses for the next 12 months of postsecondary education for the employee or the employee’s spouse, children or dependents
Payments necessary to prevent the eviction of the employee from the employee’s principal residence or foreclosure on the mortgage on that residence
Funeral expenses
Certain expenses relating to the repair of damage to the employee’s principal residence

If you want to make an in-service withdrawal before age 59 ½ and you aren’t experiencing any of these qualifying hardships, you can also expect a 10% penalty and possibly income tax. According to the IRS, “financial need may be immediate and heavy even if it was reasonably foreseeable or voluntarily incurred by the employee.”

Still, taxes can be complicated, and you could be hit with a penalty even if you aren’t expecting one. For that reason, the decision should be carefully considered, potentially with the help of a financial advisor or tax professional.

Does Your Plan Allow In-Service Withdrawals?

In-service withdrawals are optional plan features, not federally required benefits. The IRS permits these distributions, but employers do not have to offer them.

The IRS permit distributions from 401(k)s following specified events. However, the plan document determines which events, participants and contribution sources qualify.

Review the Summary Plan Description, or SPD, for age requirements, eligible balances, fees and withdrawal limits. HR or the plan recordkeeper can provide a copy. If you’re viewing the SPD on a device, it may be helpful to search for the following terms:

“in-service distribution”
“withdrawals during employment”
“age 59 ½ distribution”
“hardship withdrawal”
“rollover”

Tax Implications

An in-service withdrawal can have significant tax consequences and penalties depending on the circumstances. The IRS has laid out several scenarios in which the 10% penalty will not apply, even if you are younger than 59 ½. Those scenarios include:

Payments made to a beneficiary after the death of the participant
Payments made to a participant for medical care up to the amount allowable as a medical expense deduction
Timely payments made to reduce excess contributions
Payments made because the participant has a qualifying disability

Check with your plan’s administrator to find out when you can make an in-service withdrawal without penalties.

Frequently Asked Questions

Can I roll my 401(k) into an IRA while still employed?

Sometimes. The plan must permit in-service distributions, and the contribution source must be eligible.

Does every 401(k) plan allow in-service withdrawals?

No. These withdrawals are optional plan features. The SPD explains whether they are available.

Does a hardship withdrawal avoid the 10% penalty?

Generally, no. A separate penalty exception must apply.

Is the Rule of 55 an in-service rule?

No. It requires separation from service and applies only after employment ends.

Bottom Line

An in-service withdrawal allows you to take money from an employer-sponsored retirement plan, such as a 401(k), while you are still employed. Whether you can make one depends on your plan’s rules and the reason for the distribution.

Some plans permit withdrawals after age 59 ½ or for qualifying financial hardships. However, qualifying for a hardship distribution does not necessarily exempt you from the 10% additional tax on early distributions. Check your plan documents and consider consulting a financial or tax professional before making an in-service withdrawal.

Tips for Retirement Planning

A financial advisor can guide you through major financial decisions, like determining your investing strategy. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Deciding how to invest can be a challenge, especially when you don’t know how much your money will grow over time. SmartAsset’s investment calculator can help you estimate how much your money will grow to help you decide which type of investment is right for you.