Take control of your 401(k) in-service distributions (ISD)

Wouldn’t it be great if your “half birthday” felt as special as it did when you were a kid? It could when you turn 59 ½ and if you are eligible for an in-service distribution (ISD) from your 401(k) plan if it offers one.

As with all investment decisions, there are factors to consider. Here are answers to three commonly asked ISD questions that can help you begin a conversation with us.¹

What is an in-service distribution?

An ISD enables you to directly roll over funds from your 401(k) plan to an IRA while you’re still employed at age 59 ½ – without triggering a taxable event. Many employer-sponsored retirement plans offer an ISD option, but not all, and there may be unique requirements your employer or plan administrator can discuss with you.

What are some of the advantages of an in-service distribution?

If you’re considering an ISD, be pragmatic and talk with your financial advisor, as there are benefits with both 401(k) plans and IRAs. In general, an ISD rollover to an IRA enables you to:

• Select from a wider range of investments, which may help you reduce risk in your portfolio.
• Enjoy greater flexibility when taking income during retirement.
• Receive exceptions to premature distribution penalties.

What are some of the disadvantages?

When considering a 401(k) in-service withdrawal, it’s important to know you’re beholden to the rules governing IRAs if you do. Here are a few aspects to discuss with your financial advisor:

• A special tax strategy called net unrealized appreciation (NUA) could offer benefits if you have highly appreciated company stock in your employer’s retirement plan. You cannot use the NUA strategy if employer stock is rolled into an IRA and adhere to other rules for NUA.
• 401(k) accounts provide broader federal protection from creditors.
• If you leave your employer in the year you turn 55 or later, you can take penalty free distributions from an employer plan. You must be 59 ½ or older to take penalty free distributions from an IRA (unless other exceptions apply).
• When you reach a certain age, you must take annual required minimum distributions (RMDs) from an IRA. There are no RMDs with a 401(k) plan while you are still working. You are required to take your RMD by April 1 of the year after you reach your RMD age:

• Some 401(k) plans may offer a loan option; IRAs do not.
• Employer plans are not subject to certain fees that apply to an IRA.
• Your ability to contribute to your 401(k) may be temporarily affected.
• After-tax contributions to a qualified plan are kept separate from pretax contributions and can often be distributed separately. This is not the case for IRAs.

Let’s talk

If you’re age 50 or older, now’s the time to consider whether a 401(k) in service withdrawal is right for you. Contact us and your tax advisor for help in deciding what actions may better position you to achieve your financial goals.