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In-service Withdrawal

In-service withdrawal is a term used in the 401(k) industry to describe a transaction allowing an employee to withdraw funds from their 401(k) plan while they are still employed. This type of withdrawal is often subject to certain rules and restrictions, which can vary depending on the specific plan’s guidelines and the reasons for the withdrawal.

Typically, in-service withdrawals may be permitted under certain circumstances, such as financial hardship, medical expenses, the purchase of a primary residence, payment of education fees, or to prevent eviction or foreclosure on a mortgage. The age of 59½ is also a standard threshold, after which employees may be allowed to make an in-service withdrawal without facing an early withdrawal penalty.

However, not all plans offer in-service withdrawals, and those that do may impose various conditions, like proving the need for a hardship withdrawal or limiting the types of funds that can be withdrawn (for example, employee contributions vs. employer contributions). Tax implications also need to be considered, as in-service withdrawals are typically included in taxable income for the year they are received, and additional penalties can apply if the employee is younger than 59½ years old.

It’s important for employees to review their individual plan details and consult with a financial advisor or tax professional before making an in-service withdrawal to understand all the implications.