If you have contributed for a long time to a 401(k) plan, chances are you have built up considerable assets. You are to be commended for this effort. It takes discipline and focus to accumulate wealth over time. Having reached this point, you may now want to explore options outside of your plan. If you are past your late 50s, you might have an opportunity with a different withdrawal. Many people with 401(k) accounts assume that their funds are locked tight until they retire. What they don’t know is that they might be able to access their funds while still working at their employer. This mechanism is formally called an in-service withdrawal. But what exactly is it? Under what conditions can you take one? And what consequences are there for doing so?
In-Service Withdrawal
In the language of 401(k) plans, there are certain life events that are categorized as “triggering” events. During an approved triggering event, you are permitted to roll funds out of your 401(k) without facing a 10% early withdrawal tax penalty. Generally, however, you will have to pay taxes on the withdrawn amount. On the other hand, an in-service withdrawal is an option that arises when you reach age 59.5. This process doesn’t need an approved triggering event, such as a leave from your workplace or retirement. You still work for your employer, and once you turn 59.5, you can take a withdrawal from your 401(k) plan. From there, you would have a period of 60 days to move your funds into an IRA. If the 60-day deadline isn’t met, there would be consequences. As a plan participant, you might be subject to any taxes that accompany a withdrawal.
Not the Same as Hardship Provisions
It’s good to acknowledge that this kind of in-service withdrawal is “non-hardship.” In other words, the withdrawal won’t be used for any “immediate and heavy” financial need as defined by the IRS. That said, some 401(k) plans do come with hardship provisions, including for unreimbursed medical expenses, education costs, or purchase of a principal residence. In the event of a hardship, a 401(k) plan may permit penalty-free withdrawals so long as certain conditions are met.