# In-Service Withdrawal: Definition, Rules, Taxes & Penalties

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## What Is an In-Service Withdrawal?

An in-service withdrawal occurs when an employee takes a [distribution](https://www.investopedia.com/terms/d/distribution.asp) from a qualified, employer-sponsored retirement plan, such as a 401(k) account, without leaving the employ of their company.

This may occur without a tax penalty any time after the employee reaches age 59½, or if the employee withdraws up to $10,000 to purchase their first home, declares a [hardship](https://www.investopedia.com/terms/h/hardship_withdrawal.asp), or establishes extreme financial need. In some cases, in-service withdrawals can be made without these events occurring.

Not every retirement plan allows in-service withdrawals, but in 2019, about 70% of those available in the U.S. did offer this option under certain conditions.

### Key Takeaways

*   In-service withdrawals refer to taking special distributions from a [qualified, employer-sponsored retirement plan](https://www.investopedia.com/terms/q/qrp.asp).
*   These distributions occur while the employee is still employed.
*   The distributions are normally available for hardship cases.
*   Special rules allow some plan participants to take distributions even without hardship.

## Understanding In-Service Withdrawals

By law, normal withdrawals from retirement plans can be made as a result of employment change, hardship and documented financial need, or once the employee has reached 59½ years of age.

In-service withdrawals are a little different. If the plan allows in-service withdrawals, then an employee can take a distribution merely for the purpose of pursuing different investment options that they deem to be more suitable for them. This is usually done in the form of an allowable [rollover](https://www.investopedia.com/terms/i/ira-rollover.asp) from the plan to a previously existing 401(k) account or a new traditional [Individual Retirement Account (IRA)](https://www.investopedia.com/terms/i/ira.asp).

This provision can be tricky. Rolling over savings from a 401(k) plan to a traditional IRA is allowed by law if the money being moved is from employer contributions (either [matched money](https://www.investopedia.com/terms/m/matchingcontribution.asp) or [profit-sharing](https://www.investopedia.com/terms/p/profitsharingplan.asp) accumulations). All pre-tax funds (employee deferrals and employer contributions) in a 401(k) can generally be rolled, though after-tax contributions (if there are any) might need to be handled separately and rolled into a different account.

The solution is to know precisely what your plan allows and what it does not. Finding out such details might be a little harder than it sounds for some employees, because a company administering a company-sponsored retirement plan has an incentive to keep participants from taking money out of their accounts early. The government agrees that employees who are saving for retirement should be very careful about withdrawing money early.

These two factors combine to inhibit your ability to find out the details of your plan's in-service withdrawals because your employer might not advertise such provisions, and the government doesn't require them to do so. To find the information you need, you'll likely have to search a bit online or make a phone call to your 401(k) helpline.

## What to Ask Your Plan Administrator About In-Service Withdrawals

If you don't like your current investment options and want to move some or all of your 401(k) money to an IRA that has better choices, you'll need to search for the FAQ pages or call and ask direct questions of the company which manages your retirement plan. Look for the answer to these four questions:

1.  Does the plan I am enrolled in allow for in-service withdrawals?
2.  If so, what conditions apply?
3.  What type of account can I move this money into?
4.  What are the tax consequences of this withdrawal?

You can also explore what fund options are available if you move forward with a withdrawal, especially if you want more investment options. Once you've determined that your plan does allow non-hardship, in-service withdrawals, you'll want to pay attention to the tax consequences of such a decision.

Typically, the distribution must be made to a traditional IRA to avoid generating new taxes, but oftentimes, a distribution to a [Roth IRA](https://www.investopedia.com/terms/r/rothira.asp) is allowed if you are willing to pay the taxes that will come from such an action.

Some people might consider paying taxes or penalties worthwhile if their investment options were good enough, but most investors and financial advisers would agree it is generally not considered a sound choice to do so. Still, individual circumstances vary and no one can say that one single choice is best for all investors.

That being said, you should be very careful about your choices in this area. Investors have lost significant money chasing after investments that suggest higher-than-normal rates of return, and in hindsight, paying taxes for the privilege of losing money can feel like adding salt to an open wound.

## Tax Implications of In-Service Withdrawals

Most withdrawals made from a qualified employer-sponsored retirement plan before reaching age 59½ will come with a 10% [early-withdrawal](https://www.investopedia.com/terms/e/earlywithdrawal.asp) penalty tax on the amount being distributed. This is in addition to applicable federal income and state taxes. Some exemptions are defined by the [Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp). 

> **Fast Fact**
>
> The 10% premature penalty tax can be waived if the in-service withdrawal or hardship distribution is used to cover medical expenses that exceed 7.5% of adjusted gross income (AGI).

Generally speaking, non-safe harbor employer matching contributions and profit-sharing contributions can be distributed at any age. However, this depends on the employer's specific plan; for instance, there be a vesting schedule or minimum age requirement in the plan. In addition, [voluntary contributions](https://www.investopedia.com/terms/a/additional-voluntary-contribution.asp) can be withdrawn at any time, so in-service withdrawals can be used if you have alternative investment vehicles you clearly understand and are more willing to manage.  

## In-Service Withdrawals and SECURE 2.0

Since the passage of the SECURE 2.0 Act in late 2022, retirement plan participants have gained access to several new in-service withdrawal options. The law introduced penalty-free in-service withdrawals for specific situations, including federally declared disasters, terminal illness, domestic abuse, and certain personal or family emergencies.

For example, individuals diagnosed with a terminal illness may now withdraw funds from their retirement accounts without incurring the 10% early distribution penalty, with the option to repay the withdrawn amount within three years. Alternatively, victims of domestic abuse can self-certify eligibility and withdraw up to the lesser of $10,000 or 50% of their account balance, also with the ability to repay the distribution within three years.

In addition to these new withdrawal categories, SECURE 2.0 has harmonized and relaxed some of the rules for traditional hardship withdrawals. The law allows for self-certification for hardship withdrawals, simplifying the process for participants and plan administrators.

## What Types of Retirement Accounts Allow In-Service Withdrawals?

Today, most [defined-contribution plans](https://www.investopedia.com/terms/d/definedcontributionplan.asp)—such as 401(k), 403(b), 457, and Thrift Savings Plan (TSP)—allow for in-service withdrawals.

## When Can You Start to Take In-Service Withdrawals?

You can begin taking in-service withdrawals from a retirement account if you are still employed at age 59½. If you take it out sooner, you will be subject to a 10% early-withdrawal penalty, in addition to any deferred taxes due.

## Can You Contribute to a Retirement Plan If You Are Also Taking In-Service Withdrawals?

Yes, you can, as long as you do not contribute more than the annual limit (not counting any withdrawals). Note, however, that withdrawals are subject to income tax. In general, this strategy, while allowable, may not make much sense.

## The Bottom Line

Several types of employer-sponsored plans allow in-service withdrawals. Depending on the plan's rules and how the plan is structured, there may be various limitations or qualifications on when or how such withdrawals can be made.

If you can find the documentation, your plan administrator's firm should spell out the types and treatment of each eligible in-service distribution in what is called the [summary plan description](https://www.investopedia.com/terms/s/summary-plan-description.asp) or the plan document itself. Tax information may not be specified there, since specific tax details are set by the IRS.

> **Article Sources**
>
> 1.  Internal Revenue Service. “[Retirement Topics - Exceptions to Tax on Early Distributions](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions).”
>     
> 2.  Internal Revenue Service. “[401(k) Resource Guide - Plan Participants - General Distribution Rules](https://www.irs.gov/retirement-plans/plan-participant-employee/401k-resource-guide-plan-participants-general-distribution-rules).”
>     
> 3.  Internal Revenue Service. "[Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs)](https://www.irs.gov/pub/irs-pdf/p590a.pdf)." Pages 22, 44.
>     
> 4.  Internal Revenue Service. “[401(k) Plan Overview](https://www.irs.gov/retirement-plans/plan-sponsor/401k-plan-overview).”
>     
> 5.  Vanguard. "[Secure 2.0 Act Optional Provision Guide](https://institutional.vanguard.com/content/dam/inst/iig-transformation/secure20/231526.01_CMP_OOCR_TermIllnessPro_BRO_V6.pdf)."
>     
> 6.  Ed Slott and Company. "[SECURE 2.0 Changes to Traditional Hardship Withdrawals](https://irahelp.com/slottreport/how-secure-2-0-impacts-company-plan-in-service-withdrawals/)."
>     
> 7.  Thrift Savings Plans. "[Financial Hardship](https://www.tsp.gov/in-service-withdrawal-basics/financial-hardship/)."
>     
> 8.  Internal Revenue Service. “[Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits)."
>     
> 9.  Internal Revenue Service. “[Retirement Topics - IRA Contribution Limits](https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits)."