In-service Distributions: How to Tap your 401(k) while Still Employed | Lord Abbett
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Retirement Perspectives

In our latest podcast, we explain the rules for withdrawing funds from a retirement account when a person is still working.



Retirement Spotlight Podcast (recorded July 22, 2020)

In-service Distributions: How to Tap your 401(k) while Still Employed

Welcome to Retirement Spotlight, Lord Abbett's podcast series.

This is Karyn McCormack.

This is our second 'At Home' podcast edition, given that we're all still working from home. We're recording via Zoom again today, and I know our talented sound engineer Tony will help us sound the best we can! I hope everyone listening is safe and is healthy during this very challenging time. Let's just get right to it.

Our guest today is Brian Dobbis. He's Lord Abbett's Director of Retirement Solutions. And he is going to be talking today about what's commonly called "in-service distributions".And essentially, it's how to tap your 401(k) plan while you're still employed.

Welcome, Brian. Thanks for joining us.

Brian Dobbis: Welcome, Karyn. Thank you for having me.

Karyn McCormack: Let's start with, what is an in-service withdrawal from a 401(k) plan?

Brian Dobbis: 401(k) assets are earmarked for retirement. Therefore, generally, making a withdrawal from your 401(k) plan requires a plan participant to experience what is known as a triggering event. Common examples are separation from service, disability, death, or retirement.

Most frequently, participants upon experiencing a triggering event will withdraw their 401(k) plans when changing jobs. Thereafter, the assets are transferred, tax-free into an IRA or transferred to their new employer's retirement plan, assuming the plan allows rollovers. Whereas an in-service withdrawal is just that: A distribution of planned funds while still employed by the employer sponsoring the 401(k) plan. However, Karyn, this is critical for our listeners. Even if a plan permits in-service withdrawals, some sources of funds may not be eligible for the in-service distribution.

Karyn McCormack: Okay. And so who's eligible to take an in-service distribution?

Brian Dobbis: Yeah. Great question. And answer's a little tricky. So first and foremost, and most importantly, a 401(k) plan is not required to offer an in-service withdrawal feature to the plan participants. In other words, it's optional. However, even if a plan does permit in-service withdrawals, the assets may not be available from some sources and or funds at all. So therefore, it's important to know ahead of time whether or not your plan offers an in-service withdrawal feature.

Karyn McCormack: So a participant would need to check with their company, with their plan sponsor if they offer this, right?

Brian Dobbis: Yeah, Karyn. And they would need-- there's a couple different options a participant has to determine whether their plan offers an in-service withdrawal feature. And they are as follows: they can check with their human resources or benefits department. They could read their 401(k) plan summary description. A summary description is simply a summary of the plan, rules, and provisions written in such a way that they're easy to understand. And a summary plan description is required to be distributed to all eligible plan participants.

Or a third option, almost all 401(k) plans do have an online account. A lot of 401(k) plans-- when you view your online account, will let you know or-- clearly specify or clearly state the reasons-- you could take a distribution.

Karyn McCormack: So Brian, once a participant finds out whether their plan offers in-service distributions, are there any restrictions for them?

Brian Dobbis: Yes Karyn, there are. And as I alluded to earlier, there are restrictions that could be based on the account source, such as salary deferrals, profit sharing, employer match. These restrictions are generally based on such factors as age and service. So again, in other words, even if an employer offers an in-service distribution feature, it doesn't mean that all the assets in your 401(k) plan are eligible for an in-service distribution.

Karyn McCormack: So then when can a participant take an in-service distribution?

Brian Dobbis: Yeah, the answer here is a little meaty. So I'm going to do my best here to clarify things and break it down per money source. So let's start with the most common type of retirement plan, the 401(k). The rules permit withdrawals from an employee's 401(k) salary deferral money-- such as Roth, and/or pretax-- only once you obtain age 59½ or a financial hardship occurs, such as medical expenses to prevent eviction-- or funeral expenses.So Karyn, if you have a participant who wants to access their salary deferrals and they're not 59½, they cannot, unfortunately -- an in-service distribution is not in the cards for them. Whereas, in a 401(k) plan, there are other money sources such as profit sharing and matching contributions. These are known as employer contributions.These dollars can be accessed under different circumstances-- for example, the law permits withdrawals from an employer-funded profit sharing plan while the employee is employed again-- after a certain amount of years of participation. Generally, you must be employed at least two years or have participated in the plan for a certain amount of time, such as at least five years. And again, just like 401(k) deferrals, you can also access these assets due to disability, illness, or financial hardships.

Now Karyn, there's one other thing I thought I would just point out here. In a 401(k) plan, there are other, maybe less common, sources of money, such as rollovers. Maybe you worked for ABC company and you rolled those assets into XYZ company where you're still employed. Rollover contributions generally can be rolled out of a plan, again, while you're still employed, at any time.In addition, some plans offer what are known as voluntary aftertax contributions. These, again, is your own money you're deferring into the plan. And even though this is your own money, it's not treated like a pretax or Roth salary deferral. Generally, you can roll over aftertax voluntary contributions at any time. So to sum it up, Karyn, once you determine your plan permits an in-service distribution, the second item on your checklist is to determine which contribution types are available for the in-service distribution, and what is the eligibility?

Karyn McCormack: Okay. So then-- what if you do take the in-service distribution and maybe you don't need it all? Can you roll it over into an IRA?

Brian Dobbis: As long as the participant is younger than age 72, which is the new increased required minimum distribution age, any in-service distribution could be rolled over to an IRA, which is tax-free. However, Karyn, if the participant wants the cash and doesn't want to roll it over to an IRA, then it could potentially be subject to income taxes and/or penalties.

Karyn McCormack: Right. So you really do have to be careful there. And then what about other retirement plans? A 403(b), 457? Do they allow for in-service distributions?

Brian Dobbis: Well, throughout the years, Karyn, Congress has created a variety of retirement plans in addition to the 401(k). You just named a few. The 403(b), the 457(b), profit sharing, money purchase, to name a few. Each plan type has its own separate in-service distribution rules.;Therefore, for our listeners, if you participate in a non-401(k) plan-- I would urge you to, again, look at your summary plan description. Also view our article on that covers in-service distributions on these other plan types to just get a better feel for whether or not you are allowed to do an in-service distribution, and under what circumstances.

Karyn McCormack: Yeah, speaking of our article, I should mention that our article that we wrote two years ago, right Brian? It has been one of the most popular articles on our website that you've written.

Brian Dobbis: Yes Karyn, the feedback has been tremendous. And I would urge our listeners to look at that ( article, in-service distributions for all retirement accounts, including IRAs-- which don't specifically have in-service distribution rules. IRA distribution rules are very liberal. You can take a distribution at any time for any reason. However, again, Karyn, for our listeners, depending on your age and the reason for the distribution, taxes and penalties may apply.

Karyn McCormack: All good information, Brian. Thanks so much for being with us today to talk about tapping our 401(k).

Brian Dobbis: Great. Thank you for having me.

Karyn McCormack: As Brian mentioned, you can find more information on our website, You can also follow Lord Abbett on LinkedIn to see our most updated retirement articles.

Advisors, if you have additional questions, please contact your Lord Abbett representative at 888-522-2388. Individual investors, please contact your financial advisor and/or accountant if you have any questions. Thanks for listening to our at-home edition of retirement spotlight. We hope you're all staying safe and healthy. Ta-Ta for now.

ANNOUNCER: That's it for this addition of Retirement Spotlight. Please drop us a line on social media, or visit our website at Our audio podcasts are available on iTunes, Spotify, TuneIn, and other major streaming media services. Thanks for listening.


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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.

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. 401(k) </strong>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.

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 employeea's SEP IRA.

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