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Retirement at age 59 1/2DisabilityTermination from your jobDeath
It’s considered to be a regular withdrawal if one of these factors applies to you.
Alternate name: Early distribution
How In-Service Withdrawal Works
Making an in-service withdrawal from your 401(k) is almost never a good idea. You’ll be subject to taxes and penalties in just about every case. Taking an early distribution will also reduce the value of your 401(k), often permanently. You’ll also lose the bonus of non-taxable compounding, which will leave you with less money when you retire.
Defined Benefit Retirement Accounts
Defined benefit retirement accounts are administered by a pension fund manager. These plans usually require that the employee contribute a percentage of their salary to their account. The company often matches that contribution in some way. One of the biggest differences between defined benefit and defined contribution plans is that you usually have to be vested in a defined benefit plan. You can’t withdraw any money—including the money you put in—until you’re vested. You get a set benefit payment per month when you retire. Defined benefit plans include many teacher retirement plans (TRS).
Defined Contribution Retirement Accounts
Defined contribution retirement plans often require that both the employee and the employer contribute to the plan. The employer will often match the employee’s contribution up to a certain percentage. You may also have to be vested. The vesting could be on a schedule. You can always draw out your own funds if you have a defined contribution plan, but you can only draw out your employer’s funds according to the vesting schedule if there is one. Examples of defined contribution plans include 401(k) and 403(b) plans. The rules of these plans are set by the IRS.
Other Retirement Accounts
There are other types of retirement accounts, including:
Thrift Savings Plans: These are retirement funds for federal government employees. They have rules that are very much like those of 401(k) plans. Section 457(b): These are non-qualified, eligible deferred compensation plans for state and local governments and tax-exempt organizations. They follow different rules. Employees can make in-service withdrawals at any time. SEP and SIMPLE Individual Retirement Accounts (IRAs): These are used in small businesses. There are no rules for in-service withdrawal for a SEP IRA. SIMPLE IRAs have vesting requirements. The penalty for an in-service withdrawal is increased to 25% if you haven’t been vested (generally during the first two years you’re in the plan).
When Can In-Service Withdrawals Be Taken?
There are allowable circumstances in accounts that permit in-service withdrawals. The need for the in-service withdrawal must be immediate. You must also be facing a heavy financial burden. The funds can only come from employee/employer matching contributions, not from any income earned on them.
Reasons for an In-Service Withdrawal
The IRS set six allowable reasons for an in-service withdrawal in 2017:
