In Service Distribution- 401k Rollover While You’re Still Working

Joseph Meyer
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Rules on 401k In-Service Distribution

Are you already thinking of retirement? But how do you prepare for it when you still have a few years of work in front of you? The best thing you must do is to rollover your 401k account while you’re still working. Rollover your 401k into your self-employed retirement accounts. It makes sense to get this done right away as not only does this give you a tax advantage, but you can also be assured that you have enough money in your retirement funds.

You can do this right away by rolling over your 401k to Aspen Leaf, which is a self-directed IRA. Aspen Leaf is an IRA custodian with 100% control over your retirement assets; you can invest in anything that meets your retirement goals and objectives.

There are very few custodians that offer this to the public; Aspen Leaf is one of the few available options out there. The best part is, you can set up your self-directed IRA with Aspen Leaf in a few minutes.

Reasons to Do a 401k In-Service Distribution

You may have retirement savings invested in a company retirement plan, and you’re eligible to receive a lump-sum distribution due to either a hardship or qualifying event as outlined in your plan document. While you can move retirement savings from plan to plan and even to an IRA, there are some good reasons to take a distribution while you’re still working for your company.

After distribution, you’ll have more control over your retirement savings (the money goes into an account you direct vs. staying in the company plan).

You’re required to start taking minimum distributions after reaching age 70½ (if you’re married and inherit another spouse’s IRA account, you have unlimited choices with respect to distributions starting at age 70½).

You can get cash in your hands rather than leaving money in your former employer’s retirement plan.

Here are some other reasons for doing a 401k in-service distribution: It can be convenient … to reinvest the funds while you’re still employed, you don’t have to take distributions while you’re working.

Disadvantages of 401k In-Service Distributions

Although some companies allow you to continue contributing to their 401k plan for as long as you’re employed there, you can’t make additional investments into the same 401k account after you begin taking distributions.

You used to be able to withdraw funds from your 401k anytime you wanted – but not anymore. In 2008, the federal government changed the rules. Now, you’re generally only permitted to take a distribution from your 401k if you’re in your 59 (or 591/2) till 70).

Distributions are taxed as ordinary income at the time that they’re withdrawn. So if your 401k balance is at its peak, the distribution will be subject to the highest federal marginal tax bracket.

In service distributions are more expensive because they’re subject to a federal 10% early withdrawal penalty if you’re not at or beyond normal retirement age.

In service distributions are not subject to the federal pre-59 early withdrawal penalty that applies to withdrawals prior to age 59. However, they are subject to the rolling penalty that may apply depending on the year in which you put in the in-service distributions.

Where to Rollover

The vast majority of us at some point or another as we near retirement will be faced with the dilemma of what to do with our 401(k). Whether it’s with our current employer or a new employer, we’ll have a difficult decision to make.

In most cases, an in service distribution will involve financial penalties that will erode a lot of the value in your 401(k). That’s why it’s often best to wait until retirement to make a decision.

But if you’ve reached retirement age, there are some exceptions.

If you’re switching to a company that offers a 401(k), you may be able to roll over your old 401(k) into your new one, as long as the company accepts the transfer. You’ll have to find out directly from the new company if this is an available option.

If you’re retiring and moving to a new state that has no income tax and the state you are leaving does not allow you to take your 401(k) with you, then you can take an in service distribution.