Tapping Into Company-Sponsored Retirement Plans While Still Employed | Lord Abbett
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Retirement Perspectives

The rules governing in-service distributions are complex and constantly changing. It is important to be familiar with the rules and their nuances to avoid making costly errors.

An employer-sponsored retirement plan may serve as an effective and powerful tool in helping investors reach their retirement goals. Unfortunately, all plans aren’t created equal; some may lack certain features or impose restrictions that make it more challenging to achieve those goals. In-service withdrawals provide flexibility by allowing participants to withdraw and/or roll over their account while employed

That said, retirement plans are intended for retirement. Consequently, rules governing distributions generally discourage participants from withdrawing from their accounts prior to that. However, the IRS recognizes certain “distributable events,” such as separation from service, that enable participants to distribute their accounts earlier.

There also are times when plan participants are eligible to distribute or roll over all or part of their retirement accounts while still employed, and without demonstrating a specific financial need or hardship—an event referred to as an “in-service distribution.” Of particular importance is an understanding of the rules governing when participants may be eligible for an in-service withdrawal.

Although permitted by the regulations, a plan sponsor (employer) is not required to offer in-service withdrawals. It is an optional plan provision employers might choose. A recent survey by the Profit Sharing Council of America (PSCA) indicated that 77% of 401(k) plans allow for in-service withdrawals.1

In-service distributions potentially are available from a variety of qualified retirement plans, such as 401(k)s, profit-sharing plans, pension plans, employee stock ownership plans (ESOPs) and 403(b) plans. But they do not follow a one-size-fits-all approach: different withdrawal rules govern different types of contributions (e.g., salary deferral, match, profit sharing, rollover, etc.). The in-service rules that apply to qualified plans do not apply to employer-sponsored IRA plans, such as SEP, SAR SEP, or SIMPLE IRAs. Generally speaking, IRA distribution rules allow a participant to roll over their assets at any time.

Why Take an In-service Distribution?
There are several things that might prompt employees to withdraw their savings from their employer-sponsored plan, such as high fees, limited investment choices, or an inability to customize the plan to an individual’s specific needs. But by rolling over assets into an IRA, participants have more control and options.

It is important to know that an in-service distribution, by itself, typically is treated as ordinary income and could trigger a tax liability. Participants younger than 59½ could also incur a 10% early-withdrawal penalty. But if the distribution is rolled over into an IRA, a participant will continue to benefit from tax-deferral status and not incur an immediate tax liability or penalty.

Which Plans Permit In-service Distributions?
Many, but not all, employers offer non-hardship withdrawals during employment. To find out if your clients (or prospects) are eligible, ask your clients to provide a copy of their employer’s Summary Plan Description (SPD), which offers a simplified explanation of the company’s retirement plan rules set out in a Q&A format. Usually, there is a section titled: “When are benefits available for distribution?” 

For advisors seeking out IRA rollover opportunities, Lord Abbett offers Insights & Intelligence—a proprietary, easy-to-use tool that can assist you in locating qualified retirement plans that offer in-service withdrawal options through companies in your community.

Here are general plan-by plan guidelines to assist in your client discussions.

401(k) Plans

- Regulations restrict access to employee salary-deferral contributions (pretax and/or Roth), and employers’ safe harbor contributions (match and/or non-elective) before the participant is 59½ years old. In other words, these specific pools of money are off limits to participants younger than 59½, even in plans that permit in-service withdrawals. That makes older individuals ideal candidates.

- However, the age restriction does not apply to an account that was previously rolled over from a prior employer’s plan or from an IRA. Rollover accounts often are unrestricted. The SPD will provide guidance.

- Aftertax (not Roth) contributions are generally eligible for an in-service withdrawal. Recent taxpayer-friendly rules offer participants the capability of moving these dollars to a Roth IRA—potentially tax-free.

- Small-business owners have the option to amend their plan to permit in-service distributions; but this option must be available to all employees.

Profit-Sharing Plans

- Plans may offer in-service distributions at any age.

- Participants may take a distribution after as little as two years of service.

- Only assets that have been in the plan for at least two years are eligible.

- Some plans allow in-service withdrawals of aftertax amounts (not Roth). The SPD will provide guidance.

Pension Plans (Defined Benefit, Money Purchase and Target Benefits Plans)

- In general, pension plans do not allow for in-service distributions except at the normal retirement age. The Pension Protection Act of 2006 added language to allow plans to make in-service distributions available as early as age 62. The SPD should provide guidance.


SEP IRAs generally are easier to handle, because the assets are already in IRA accounts. There are no applicable withdrawal restrictions, which makes transfers easier.

SIMPLE IRA accounts must be established for at least two years before funds can be transferred to any other account except another SIMPLE.

- SIMPLE IRAs can accept rollovers only from another SIMPLE IRA.

403(b) Plans

- 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.

Governmental 457(b) Plan

- In general, an in-service distribution is available at 70½ (not 59½).

- Permits 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, assuming  the plan offers this provision.

Why Should a Participant Consider an In-service Rollover to an IRA?

- More diverse selection of investments.

- Additional contributions permitted after rolling over.

Beneficiary flexibility—Participants who are married generally can name anyone as their beneficiary. (Note: Different rules apply for community property states.)

- IRA assets can be accessed (rolled over) once a year without taxes and/or penalties, as long as they are repaid within 60 days.

- Potential access before age 59½ to periodic payments, without being assessed the 10% early-withdrawal penalty, under Section 72(t) of the Internal Revenue Code.

- Ability to convert assets to a Roth IRA.

- Additional exceptions to the 10% early-withdrawal penalty include: 1) higher education; 2) first-time home purchase; and 3) medical insurance premiums while unemployed.

- Legacy planning via Stretch IRAs

That said, there are times when rolling over assets into an IRA may not be appropriate or the optimum choice. (For an overview, see our blog, “IRA Rollovers: Finding the Right Fit.”)

Individuals should consult with their advisors. Advisors should familiarize themselves with the rules governing in-service withdrawals, which can provide another route of access to the $7.2 trillion IRA market.


1 PSCA’s 57th Annual Survey of Profit-Sharing and 401(k) Plans.


401(k) is a qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on an after tax and/or pretax basis. Employers offering a 401(k) plan may make matching or non-elective 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.

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.

An IRA rollover may involve the application of fees and charges to the investor.

There may be fees, expenses, taxes and penalties associated with early IRA withdrawals.

SEP IRA—A Simplified Employee Pension Plan 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.

SIMPLE  IRA—A Savings Incentive Match Plan for Employees' IRA 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 non-elective 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.

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.





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