As retirement approaches, many individuals begin reviewing how their investments, taxes, and retirement income strategy fit together. What some people do not realize is that certain 401(k) plans may allow access to a planning tool called an in-service distribution before retirement or separation from service.
An in-service distribution allows eligible participants to transfer a portion of their retirement savings from a workplace plan, most commonly to an IRA, without leaving their job. Not all plans permit this option, and eligibility requirements vary by employer and plan document. In many cases, participants must be at least age 59½ before they are eligible to take an in-service distribution. The specific rules are typically outlined in the plan’s Summary Plan Description (SPD) or other plan documents.
For eligible participants, an in-service distribution may provide additional flexibility when planning for retirement. Depending on the circumstances, it may allow access to a broader range of investment options, simplify the management of retirement assets, or make it easier to coordinate retirement income and tax planning strategies.
For example, some investors accumulate retirement accounts through multiple employers over the course of their careers. Others may find that their workplace plan offers limited investment choices compared to what may be available through an IRA. An in-service distribution may create opportunities to evaluate how retirement assets fit within an overall financial plan.
That said, an in-service distribution is not appropriate for everyone. Before making any changes, it is important to understand the advantages and disadvantages of each option. Individuals considering an in-service distribution may want to review:
- Whether their employer’s plan permits in-service distributions
- Whether they have reached the plan’s eligible age, which is often age 59½
- The Summary Plan Description (SPD) and other applicable plan rules
- Available investment options inside and outside the plan
- Fees and expenses
- Retirement income planning goals
- Current and future tax considerations
Retirement planning involves more than just building retirement savings. Understanding the options available within your employer-sponsored retirement plan may help you make more informed decisions about your overall retirement strategy. If an in-service distribution is available through your plan, reviewing how it fits within your broader financial goals may be worthwhile.
