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401(k) In-Service Withdrawals

401(k) In-Service Withdrawals Jump-start Your Retirement Income Planning with an In-Service,Non-Hardship Withdrawal from Your Company-Sponsored Retirement Plan

I recently read a surprising statistic: From the beginning of 2008 to the end of 2011, the S&P 500® had 147 days with a movement of 2% or more in either direction¹. And today, as we all know, volatility continues to be a factor in the financial markets. So how can you navigate this type of market uncertainty as you prepare for retirement?

I specialize in retirement income planning, and I pride myself on helping my clients address challenges, such as market uncertainty, in the period known as The Retirement Red Zone©. It’s a critical time when you begin to think about how you’ll turn your savings into income that can last a lifetime. Within this crucial period, there are three key challenges that can jeopardize your retirement savings:

  • Increasing life spans – outliving your retirement income
  • Rising costs of living – inflation, taxes and healthcare
  • Market uncertainty – the impact of volatility


Advantages of In-Service,
Non-Hardship Withdrawals

  • Income-Oriented Investment Options
  • Diversify Concentrated Positions
  • Asset Consolidation
  • Enhanced Beneficiary Options
  • Stretch the IRA over Several Generations
  • Professional Guidance

"With an in-service,
non-hardship withdrawal, you may be able to request a distribution from your retirement account even while you are still employed and making ongoing contributions to your employer’s 401(k) plan."

Contrary to popular belief, you may not have to keep all of your retirement savings in your company-sponsored retirement plan until you change jobs or retire and if permitted, an in-service, non-hardship withdrawal can give you early access to your retirement assets. With an in-service, non-hardship withdrawal, you may be able to request a distribution from your retirement account even while you are still employed and making ongoing contributions to your employer’s 401(k) plan.

It's important to understand that this type of withdrawal is typically treated as ordinary income and could trigger a tax liability. In addition, if you’re under age 59 1/2, you could be subject to a 10% early withdrawal penalty. However, by taking the distribution and rolling it over into an IRA, you will continue to benefit from tax-deferred growth without an immediate tax liability or penalty.

Advantages of In-Service, Non-Hardship Withdrawals

  • Income-Oriented Investment Options: Company-sponsored retirement investments are designed to help people accumulate assets during their working lives. With an in-service, non-hardship withdrawal, you may be able to significantly expand your investment choices to include those that can help you generate income—even after you leave the workforce.
  • Diversify Concentrated Positions: Some plans have limited investment options. Others specify that certain contributions must be invested in company stock (e.g., employer matching contributions). Either way, you may end up with over weighted positions in company stock or one or two investment companies. This could potentially expose your retirement assets to additional risk, which may undermine long-term planning. By rolling the distribution into an IRA, you can reallocate your portfolio to potentially help you diversify, generate income, and reduce volatility.
  • Asset Consolidation: IRA rollovers can be used to help you consolidate your retirement assets. By doing so, it becomes easier to develop a comprehensive retirement income strategy, monitor performance, rebalance as needed, and calculate required minimum distributions.
  • Enhanced Beneficiary Options: Some retirement plans specify that non-spouse beneficiaries must liquidate the account when the participant passes away with the potential of a significant tax liability. With a rollover IRA, your beneficiaries could potentially have greater flexibility with their distribution options.
  • Stretch the IRA over Several Generations: If you don’t need the money in your IRA when you retire, you may be a candidate for a strategy called a Stretch IRA. A Stretch IRA may help to minimize your tax exposure and leave as much of your IRA assets to your beneficiaries as possible.
  • Professional Guidance: Why not apply the same guidance and investment acumen provided by your financial advisor to the assets in your company-sponsored retirement plan? The decisions you make in the early years of retirement might have far-reaching consequences, given today’s longer life expectancies. There is no need to go it alone. Work with your financial advisor to develop a retirement income strategy based on your unique circumstances that will help you meet present and future needs.

Before You Get Started

Consider these rules and potential issues before you take an in-service, non-hardship withdrawal:

  • Determine if the assets from the in-service, non-hardship withdrawal are pre-tax contributions or earnings from the account. This can have major tax implications.
  • You will not have the ability to use a Net Unrealized Appreciation (NUA) strategy if employer stock is rolled into an IRA².
  • Some companies penalize employees who take in-service, non-hardship withdrawals. These may include charges and suspension of contributions to the plan.
  • Asset liquidation may also trigger penalties, such as an early surrender of annuity contracts.
  • You may incur additional management expenses versus your company-sponsored plan.
  • You may lose protection from creditors if you remove assets from your company-sponsored plan.
  • Loans, which may be allowed by your company-sponsored plan, are not allowed with IRAs.
  • Consult with a tax advisor and fully understand the potential tax issues associated with moving assets from your company sponsored plan to another plan.

We are committed to helping you find the best opportunities for a secure retirement. Give us a call soon to set up a time to go over your portfolio, discuss your options and help you determine if you are eligible to take advantage of this innovative strategy. Call us at (919) 881-2850 or email Chad at with any questions you may have or to schedule a time when we can meet. Together, I am confident that we can address the financial challenges you face so that you can be better prepared for life in retirement.

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¹ Vanguard calculations, using data provided by Thomson Reuters Datastream and Barclays, 2012

² This strategy applies only if you hold your employers stock in your 401(k). A special favorable section of the tax law allows you to pay capital gains tax rates on the stock if you are separating from service with your employer, the plan is distributed in a lump sum, and the stock was purchased by your pretax contributions and employer matches. The Net Unrealized Appreciation (NUA) of the stock is not taxed upon distribution, and is taxed at capital gains tax rates when sold. Only the basis of the stock is recognized as a taxable distribution.


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