In-service 401K Rollover to an IRA While Still Employed | Lord Abbett
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Retirement Perspectives

Many employer-plan participants are unaware of rules that allow them to take a cash distribution and/or roll over their assets to an IRA while still on the job.

Many readers of this column know that distributions from qualified plans require a “triggering” event that allows participants to withdraw their funds. Such triggering events include separation from service or retirement. Further, it’s also well documented that cash distributions made prior to age 59½ are generally subject to federal and state (if applicable) income tax, plus an additional 10% early distribution penalty tax unless an exception applies.

However, what many investors may not realize is that rules allowing access to their retirement accounts over the decades have been liberalized. Now, they can access their employer plan retirement funds while employed via an “in-service” distribution, which is another way of saying plan participants can elect to take a cash distribution and/or roll over their assets to an IRA while employed.

In-service distributions are complex, so be sure to familiarize yourself with the rules and their nuances to avoid making costly errors. Of particular importance is being cognizant of when an in-service distribution option might be available.

In-service distributions provide flexibility by offering plan participants the option to withdraw from and/or roll over their account while employed. That said, retirement plans are intended for retirement. Consequently, the maze of rules governing distributions as such generally discourage participants from taking a distribution from their account prior to retirement; but there are exceptions, including separation from service, plan loan, and financial hardship.

This doesn’t mean an employer is required to offer in-service withdrawals. Instead, it is an optional plan provision. But according to a recent survey by the Profit Sharing Council of America, more than 70% of 401(k) plans do allow in-service withdrawals.1

Anyone considering such a move should refer to the plan document, which specifies whether an in-service distribution provision is available and the conditions under which a participant may take an in-service distribution. Moreover, the summary plan description (SPD) offers a simplified explanation of the company’s retirement plan rules and provisions in an easy-to-read Q&A format.

While in-service distributions are available from a wide variety of qualified retirement plans, rules on the availability of such withdrawals may vary by the type of plan and the type of contribution (e.g., employee deferrals, rollovers, employer contributions, etc.).  For example, in-service rules that apply to qualified plans do not apply to employer-sponsored IRA plans, such as SEP, SAR SEP, or SIMPLE IRAs. (IRA plan rules, on the other hand, are liberal, thus allowing a participant to take a distribution at any time and/or age, although taxes and or penalties may apply.)

Tip: An employer may choose to limit in-service distributions to situations where participants can demonstrate a financial hardship. Although deemed an in-service distribution, hardship distributions are not eligible to be rolled into an IRA. Thus, distributions due to financial hardship are subject to ordinary income taxes plus a 10% penalty for those participants under age 59½.

Which Employer Plans Permit In-service Distributions?
As mentioned earlier, many defined contribution (DC) plans today—e.g., 401(k), 403(b), 457(b), etc.—allow participants to take all or a portion of their retirement benefits out of the plan before they leave employment. But some plans only allow distributions once the individual leaves employment or retires.   

Here are general guidelines, by plan and contribution type.

In-service Distributions from 401(k) Plans
A 401(k) plan cannot permit in-service distributions of employee elective deferral accounts prior to age 59½. Instead, typically, the only way to access employee 401(k) salary deferrals (pretax or via a Roth), and employers’ safe harbor contributions (match and/or non-elective) and employer-qualified non-elective and matching contribution accounts , while employed, is through a financial hardship or 401(k) plan loan. In other words, these specific pools of money are inaccessible to employees younger than 59½, unless they die, become disabled, or end their employment.

However, the in-service rules applicable to employer contributions (profit sharing and matching) are much more liberal. Here, contributions are available for an in-service distribution upon any of the following events: the money has been contributed to the plan for a fixed number of years (at least two years); the employee has participated in the plan for five years; or the employee has attained a stated age (age (as defined in the plan document).

Virtually all DC plans permit participants to “roll in” funds from former employers’ retirement plans, including IRAs. However, employers that permit “roll-ins” into their plans also can (although are not required to) allow participants to distribute their rollover account balance at any time. However, an age restriction does not apply to an account balance that was previously rolled over from a prior employer’s plan or from an IRA. In fact, rollover accounts often are unrestricted. This design assures a participant that he or she can access these funds at any time, which makes the new plan much more appealing. The SPD will provide guidance.

Aftertax (not Roth) contributions are generally eligible for an in-service withdrawal. Recent IRS guidance described in Notice 2014-54 provides details on the taxation of a number of different transaction scenarios in which a plan participant takes a distribution from his or her company retirement plan that contains both pretax and aftertax funds (not Roth), and offers participants the capability of rolling over aftertax dollars to a Roth IRA, potentially tax-free. If the plan document permits, it may be possible for a participant to request, at any time or age, a distribution of aftertax contributions while employed. The IRS via Notice 2014-54 has confirmed that participants with both pretax and aftertax assets in their 401(k) plans can allocate the pretax portions of their plan distributions to traditional IRA rollovers and aftertax portions of their distributions to tax-free Roth IRA conversions!

Tip: There are slightly different, more liberal and more generally more favorable distribution rules for “pre-1987” aftertax contributions. Pre-1987 aftertax contributions can potentially be distributed without associated earnings if those dollars have been separately accounted for.

In-service Distributions from Profit-Sharing Plans
The rules permits withdrawals from an employer-funded profit-sharing plan while an employee remains employed after a stated event, such as:

  • Participants may take a distribution of funds after as little as two years of service.
  • After a stated number of years of service or participation in a plan (typically at least five years) 
  • Some plans allow in-service withdrawals of aftertax amounts (not Roth). In any case, check the SPD for plan rules.

In-service Withdrawals from 457(b) Plans
Section 457(b) plans have considerable restrictions on when a participant is eligible to distribute their account balance. For example, a 457(b) plan may not make amounts deferred available to a participant earlier than: 1) the calendar year in which the participant attains age 70½; so an in-service distribution is only available at 70½; 2) when the participant has a severance of employment from the employer; or 3) when the participant faces an unforeseeable emergency (the 457 version of a financial hardship).

Tip: Some 457(b) plans permit a one-time only, in-service, small-account-balance distribution that applies to accounts valued at $5,000 or less and to which no contributions were made for the preceding two years.

In-service Distributions from Pension Plans (Defined Benefit, Money Purchase, and Target Benefits Plans)
In general, pension plans do not allow for in-service distributions except only at normal retirement age (NRA). However, the Pension Protection Act of 2006 added a provision to allow pension plans to make in-service distributions available as early as age 62, even if the NRA is greater than 62. Thus, defined benefit, cash balance, and money purchase pension plans generally do not permit in-service distributions before age 62. Further, withdrawals due to a financial hardship prior to age 62 are not permitted.

In-service Withdrawals from 403(b) Plans
These plans are unique in their way, because the in-service distribution rules applicable to 403(b) plans depend on the applicable funding vehicle. The 403(b) investment options generally come in two types: a section 403(b)(1) account, which invests solely in annuities, and a section 403(b)(7) custodial account, which allows for investment in mutual funds. With either plan type, amounts attributable to 403(b) elective deferrals (pretax or Roth) are not available for in-service distributions before age 59½, unless the employee has a severance from employment, dies, has a hardship, or becomes disabled. Notably, distributions from 403(b) employer contributions are permitted upon a stated age (as defined in the plan document), event, or after a fixed number of years, with IRS guidance stating a minimum of at least two-year waiting period. In summary, 403(b) distribution restrictions are dependent upon a number of variables, including the funding vehicle (annuity or custodial account), contribution type (salary deferral, employer contribution, etc.), and satisfying a “triggering” event. So, always review the plan document for specific rules applying to in-service distributions.   

However, for employer contribution amounts held in a 403(b)(1) annuity contract, the plan may (but is not required to) provide for in-service distribution upon the occurrence of a specified event (e.g., fixed number of years, attainment of specified age). Further:

  • A participant may be eligible for an in-service distribution upon turning age 59½, provided that the plan document permits such distributions.
  • A “contract exchange” allows for the transfer of all or some portion of a participant’s account to another 403(b) vendor included in the employer’s plan.
  • The plan document must list all eligible 403(b) providers.  Check the SPD for plan specifics.

A SEP IRA generally follows the distribution rules that are applicable to traditional IRA; thus, there are no applicable withdrawal restrictions; although taxes and penalties may apply. SIMPLE IRAs, however, assess a 25% (not 10%) early distribution penalty on assets that are distributed (including a rollover or Roth conversion) within the first two years of plan participation. A participant can, however, transfer his or her account to another SIMPLE IRA provider in the first two years without being subject to taxes or 25% penalty.

Tip: The Protecting Americans from Tax Hikes Act of 2015 expanded SIMPLE IRA portability. Now, once the two-year waiting period has been met, a SIMPLE IRA can now receive rollover eligible funds from other types of retirement plans (e.g., 401(k), 403(b), etc.). In other words, you can now roll over IRA funds and employer plan funds into your SIMPLE IRA, once the two-year waiting period is over.


1 Source: Plan Sponsor Council of America, 59th Annual Survey, 2016.

To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax information contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, or recommending to another party any transaction, arrangement, or other matter.

The information is being provided for general educational purposes only and is not intended to provide legal or tax advice. You should consult your own legal or tax advisor for guidance on regulatory compliance matters. Any examples provided are for informational purposes only and are not intended to be reflective of actual results and are not indicative of any particular client situation.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett's products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.


Traditional IRA contributions plus earnings, interest, dividends, and capital gains may compound tax-deferred until you withdraw them as retirement income. Amounts withdrawn from traditional IRA plans are generally included as taxable income in the year received and may be subject to 10% federal tax penalties if withdrawn prior to age 59½, unless an exception applies.

A Roth IRA is a tax-deferred and potentially tax-free savings plan available to all working individuals and their spouses who meet the IRS income requirements. Distributions, including accumulated earnings, may be made tax-free if the account has been held at least five years and the individual is at least 59½, or if any of the IRS exceptions apply. Contributions to a Roth IRA are not tax deductible, but withdrawals during retirement are generally tax-free.

A SIMPLE IRA plan is an IRA-based plan that gives small-business employers a simplified method to make contributions toward their employees’ retirement and their own retirement. Under a SIMPLE IRA plan, employees may choose to make salary reduction contributions and the employer makes matching or nonelective contributions. All contributions are made directly to an individual retirement account (IRA) set up for each employee (a SIMPLE IRA). SIMPLE IRA plans are maintained on a calendar-year basis.

A simplified employee pension plan (SEP IRA) is a retirement plan specifically designed for self-employed people and small-business owners. When establishing a SEP-IRA plan for your business, you and any eligible employees establish your own separate SEP-IRA; employer contributions are then made into each eligible employee’s SEP IRA.

401(k) is a qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on an aftertax and/or pretax basis. Employers offering a 401(k) plan may make matching or nonelective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis.

The Summary Plan Description (SPD) issued by plan administrators explains participants’ and beneficiaries’ rights, benefits, and responsibilities under the plan in understandable language. The SPD includes such information as: the plan’s requirements regarding eligibility; a description of benefits and when participants have a right to those benefits; procedures regarding claims for benefits and remedies for disputing denied claims; and the rights available to plan participants under the Employee Retirement Income Security Act (ERISA).

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