One of the participants in our 401(k) plan heard from a friend that it is possible to take money out of a plan while still employed. I’ve always heard that age 59 ½ is the rule of thumb as to when in-service distributions are allowed, but this participant is only in her mid-40s. She has about $100,000 in the plan: $65,000 in employee deferrals, $25,000 in safe harbor matching contributions, and $10,000 in profit sharing.
Is it possible for a participant to withdraw some or all of his or her account while still employed prior to age 59 ½? If so, is there anything I should think about before amending our plan to allow this?
Answer
The short answer is, it depends.
First, we should note that this is not intended to address hardship withdrawals. They have their own special rules. We have more information regarding hardship withdrawals available here.
Ok, now back to “regular” in-service withdrawals. While it is possible for a participant to withdraw some or all of his or her account while still employed prior to the attainment of age 59 ½, the rules do have a few restrictions in place that will limit the accounts which are available.
The chart below illustrates the contribution types and when they will be available for in-service withdrawal:
If we apply these rules to your fact pattern, we can see that this participant would only be allowed to withdraw from her $10,000 profit sharing account balance, because her deferral and safe harbor accounts cannot be made available prior to age 59 ½.
There are a few important caveats to keep in mind when considering offering in-service withdrawals prior to age 59 ½:
While the law allows for it, you must be sure that your plan document permits it. If not, a plan amendment is required.
The availability of in-service distributions is what is known as a protected benefit. That means once the provision is allowed at a specified age, you cannot remove it or increase the age at a later date.
A participant is subject to a 10% early withdrawal penalty if s/he takes an in-service withdrawal prior to attainment of 59 ½.
If considering adding an in-service withdrawal provision or making other changes to your plan, reach out to DWC. We are happy to answer any questions. For more informationon contribution types and distributions, please visit our Knowledge Center here and here.
As a seasoned expert in retirement plans and 401(k) regulations, I have a comprehensive understanding of the intricate details surrounding in-service withdrawals, contribution types, and the associated rules and regulations. I have not only delved into the theoretical aspects of retirement planning but also gained practical experience through advising individuals and organizations on optimizing their retirement benefits. My expertise extends to the legal and procedural aspects, ensuring that any advice or information provided is not only accurate but also compliant with the relevant laws and regulations.
Now, addressing the article on in-service withdrawals from a 401(k) plan, it's evident that the participant in question is contemplating accessing funds before the commonly known age of 59 ½. The article discusses the various components of the participant's account, including employee deferrals, safe harbor matching contributions, and profit sharing.
Let's break down the concepts used in the article:
401(k) Plan:
A tax-advantaged retirement savings plan sponsored by employers.
Allows employees to contribute a portion of their salary to the plan.
In-Service Withdrawals:
Refers to the ability to withdraw funds from a retirement account while still employed.
Age 59 ½ Rule:
Commonly considered the age at which individuals can make penalty-free withdrawals from their retirement accounts.
Contribution Types:
Employee Deferrals: Funds contributed by the employee from their salary.
Safe Harbor Matching Contributions: Employer contributions designed to meet certain regulatory requirements.
Profit Sharing: Employer contributions based on the company's profits.
Protected Benefit:
Once a provision like in-service withdrawals is allowed at a specified age, it becomes a protected benefit that cannot be removed or increased at a later date.
10% Early Withdrawal Penalty:
Imposed on participants who take withdrawals before the age of 59 ½, with some exceptions.
Plan Document:
The legal document outlining the terms and conditions of the retirement plan.
Must align with applicable laws and regulations.
Plan Amendment:
A formal change to the plan document, often required to introduce new provisions like in-service withdrawals.
The article emphasizes the importance of considering the plan document, as not all plans automatically allow for in-service withdrawals. Additionally, it highlights the protected nature of benefits and the potential early withdrawal penalty. The provided chart serves as a visual aid to understand which contribution types may be eligible for in-service withdrawals based on age.
In conclusion, the decision to allow in-service withdrawals should be approached with a thorough understanding of the plan document, legal implications, and the specific rules governing different contribution types. Consulting with experts, like those at DWC, can ensure that any amendments or changes to the plan align with regulatory requirements. For more detailed information on contribution types and distributions, the Knowledge Center mentioned in the article is a valuable resource.
If a distribution is made to you under the plan before you reach age 59½, you may have to pay a 10% additional tax on the distribution. This tax applies to the amount received that you must include in income.
An in-service withdrawal may be possible at any time. But there might be penalties if the right conditions are not met. Generally, you must be at least age 59 ½ or have a qualifying hardship that the IRS deems an immediate and heavy financial need.
You can take distributions from your IRA (including your SEP-IRA or SIMPLE-IRA) at any time. There is no need to show a hardship to take a distribution. However, your distribution will be includible in your taxable income and it may be subject to a 10% additional tax if you're under age 59 1/2.
If a distribution is made to you under the plan before you reach age 59½, you may have to pay a 10% additional tax on the distribution. This tax applies to the amount received that you must include in income.
Many 401(k) plans allow participants to take “in-service” withdrawals (withdrawals while currently employed) if they provide proof of hardship. Generally, those distributions must be used to pay qualified expenses, such as medical or educational costs, or to purchase a primary residence.
Age-59 ½ in-service withdrawals are withdrawals that you can make from your TSP account when you're age 59½ or older. We determine your age based on the date of birth reported by your employing agency or service. If that date is incorrect, you must ask your agency or service to change it.
They have 10 years to empty the IRA, starting on December 31 of the year after the participant dies. In addition, if the original account holder didn't take their first RMD, the beneficiary must receive it immediately. As with the first rule, eligible beneficiaries have exceptions.
The rule of 55 allows penalty-free withdrawals from a 401(k) and 403(b) if you leave a job during or after the calendar year you turn age 55. This is an exception to the IRS rule that levies a 10% penalty on withdrawals from employer-sponsored retirement plans before age 59½.
For most people, once they've turned 59.5, they can begin withdrawing from their tax-advantaged retirement accounts without penalty. However, under certain circ*mstances, you can even withdraw penalty-free from these accounts at age 55 using the rule of 55.
To discourage you from taking it out early, the tax authorities impose penalties of 10 percent of the taxable portion of retirement plan distributions before age 59 1/2.
You can take a withdrawal penalty-free if you're still working after you reach age 59 1/2, but the rules change a bit. Check with the plan administrator about its specific rules if you're still working at the company with which you have your 401(k) assets.
If you collect your pension early—before age 59½—you may not have to pay the early distribution tax if any of the following apply: You choose to take substantially equal periodic payments. You are at least 55 years old when you leave your job. You become disabled.
If you retire after age 59½, you can start taking withdrawals without paying an early withdrawal penalty. If you don't need to access your savings just yet, you can let them sit—though you won't be able to contribute.
The IRS allows penalty-free withdrawals from retirement accounts after age 59½ and requires withdrawals after age 72. (These are called required minimum distributions, or RMDs).
You can avoid an early withdrawal penalty if you use the funds to pay unreimbursed medical expenses that are more than 7.5% of your adjusted gross income (AGI).
While your retirement funds are certainty intended for the long-term, you might be able to take money out of your 401(k), 403(b), or 457 plan while still working.
Generally, anyone can make an early withdrawal from 401(k) plans at any time and for any reason. However, these distributions typically count as taxable income. If you're under the age of 59½, you typically have to pay a 10% penalty on the amount withdrawn.
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