Money Advice

The ins-and-outs of a 401(k) in-service distribution

Posted by The Simply Money Advisors Team on May 23, 2018 3:39:36 PM

At Simply Money Advisors, we like to educate you on all of your options for retirement planning. There are many different aspects you have to consider, including lifestyle, tax strategies, insurance, and retirement accounts.

Another factor to think about is a potential ‘in-service distribution.’ Not all 401(k) plans give you this option, but it may be something to consider if yours does. 

So, what’s an in-service distribution?

An in-service distribution (also sometimes referred to as an ‘in-service transfer’) gives you the ability to roll over a portion of your current 401(k) (or equivalent account) into an IRA before you retire from your current employer. Plans that offer this option usually only let you take in-service distributions when you’re nearing retirement, you’re disabled, or you reach a certain age (most common is 59 ½). 

Every 401(k) plan has different requirements you need to be aware of, so you want to first speak with your Human Resources department before moving forward with any transactions. You want to fully understand your plan so you can make an educated decision on whether an in-service distribution fits into your personalized financial plan.

Why is an in-service distribution beneficial?

  • Receive more control: You may have more control of your money if it’s in an IRA account opposed to a 401(k). There may be some restrictions your employer imposes. 
  • Broader diversification for your investment mix: Many 401(k) plans have limited investment options, and fees vary. By doing an in-service distribution rollover to an IRA, you can have more flexibility with your investment options you pick yourself, or, if you want, you can invest that money with a financial planner you trust. Just understand that IRAs (and financial planners) also have fees, so you’ll want to compare what you were paying before to what you would be paying in the future.
  • Employer match: Another benefit to using an in-service distribution is that you can still continue to receive your company’s 401(k) match because you’re allowed to keep your 401(k) plan active. Most employers will match your contribution up to a certain percentage.

Tax implications 

If you follow all rules regarding in-service distributions laid out in your 401(k) plan, you’re at least 59 ½, and you make a direct transfer into an IRA account, you will not have to pay any tax penalties. Be sure to check your plan documentation. All additional specifications are detailed by the IRS.

The Simply Money Point

An in-service distribution can offer a few benefits, such as greater control of your money. But before you proceed, make sure you fully understand your company’s provisions for taking these distributions, as well as if an in-service distribution makes sense for your financial situation in general.

And to help you plan for retirement, we’ve launched “Retirement Resources,” a brand new educational section of our website! You’ll find free downloadable guides, online tutorials, and live events – all designed to educate you on retirement planning, how to select a financial advisor, Social Security, and more. 

Take me to Retirement Resources

Topics: 401(K), Retirement

Disclaimer

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Simply Money Advisors), or any non-investment related content, made reference to directly or indirectly will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, this content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained here serves as the receipt of, or as a substitute for, personalized investment advice from Simply Money Advisors. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Simply Money Advisors is neither a law firm, a certified public accounting firm, nor a tax advisory firm and no portion of the blog content should be construed as legal, accounting, or tax advice. Please consult your own attorney, accountant, and tax advisor for legal, accounting, and tax advice. A copy of the Simply Money Advisors’ current written disclosure statement discussing our advisory services and fees is available for review upon request. Advisory services offered through Simply Money Advisors, a SEC registered investment adviser. Insurance services are offered through Simply Money Insurance Agency, a separate entity from Simply Money Advisors. Simply Money™ and the spiral symbol are trademarks of Simply Money IP Holdings, LLC.

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