Part Four of Four: In-service distributions: Accessing money from your 401k prior to leaving your job.

If you work for a medium to large company, chances are you have access to a 401k plan. A 401k can be a great way to save for retirement if your company offers to match your contribution to a certain point. The downside of 401k’s is that fees can be high and many plans offer very limited investment options.

For many years, it’s been understood that the only way to take money from a 401k, while still working, was to either take a loan out against your balance or request a hardship withdrawal, if your plan allows for it. A hardship withdrawal can be for medical emergencies, to pay for a funeral, or other unforeseen emergencies; but it’s up to your employer to define what they allow.

There is a potential workaround.

First of all, this will not apply to everyone as it’s specific for people over age 59 ½. There is a withdrawal called an “In-Service Distribution” or sometimes called an “In-Service Withdrawal”. If your plan has an in-service distribution option, then after age 59 ½, you’re able to rollover your entire 401k balance to your IRA and still continue to work. And yes, you’re also still able to contribute to your 401k.

Not every plan will allow an in-service distribution but more and more plans are offering them. Check with your benefits department to see if this is an option for you.

Why would you do an in-service distribution?

  1. The 401k has high fees and that is taking away from your performance.
  2. The 401k doesn’t offer you good investment choices.
  3. You feel more comfortable managing your own funds.
  4. You are concerned with the stock market and want to roll the funds to your own IRA where you can secure it.

Here is one other scenario: You just turned 59 ½ and plan on retiring at 61. Your spouse is already retired and you’re planning on selling everything and moving to, say, Costa Rica. By moving your 401k out to your IRA, you’re now able to use some of your retirement money to help prepare for your move. Without the in-service distribution, you wouldn’t have access to those funds until you retire in a year and a half. (You could also take a loan out against your balance but you’re limited to 50% of the account value.)

So if you’re 59 ½ and plan on continuing to work but need access to your 401k, an in-service distribution is worth looking into.

BONUS: There will be one more blog post on how to access your retirement money prior to 59 ½. Where this one was focused on people 59 ½ and older, the next one will be focused on people in their 30’s and 40’s.