In-service withdrawal

What an in-service withdrawal is

The rules depend on the type of money. Employee deferrals generally cannot be paid before age 59½ while the person is still employed, apart from hardship withdrawals and a few other exceptions. Employer contributions can be made available earlier if the plan says so, for example after a set number of years. Rollover and after-tax balances can be available at any time. The SECURE 2.0 Act added optional withdrawals, including up to $1,000 a year for an emergency personal expense.

Why it matters to employers

Which withdrawals to allow is a plan design decision, and the choices are written into the plan document. More options give employees flexibility but add administration, and money leaves the plan sooner. A withdrawal paid to the participant, when it could have been rolled over, has 20% withheld for federal tax, and the 10% early withdrawal tax can apply before age 59½.

Example

A 62-year-old employee wants to move $200,000 to an IRA while she keeps working. If the plan allows in-service withdrawals at 59½, she can do a direct rollover with no tax. If it does not, she has to wait until she leaves.

Common mistakes

• Paying a withdrawal the plan document does not allow.

• Confusing it with a hardship withdrawal, which requires a financial need and cannot be rolled over.

• Not offering a direct rollover when the payment qualifies for one.