Simply put, an in-service withdrawal feature lets you turn your 401(k) into retirement income. It occurs when employees withdraw funds from an employer-sponsored plan while still working at the company. Essentially, an in-service withdrawal lets you shift a portion of your money away from retirement accumulation to retirement income.
Let’s say you look at the fee disclosure on your 401(k) and determine the fees are higher than you’d like. If you’re old enough, you can move your money into an IRA a more favorable fee structure using an in-service withdrawal. Or you may want to withdraw money to purchase an annuity, which offers guaranteed income in retirement.
How an in-service withdrawal works
Consider this example: You are 60 years old with an 401(k) balance of $500,000. You are committed to saving $50,000 each year for the next 10 years (meaning you’d save another $500,000 in that time). You might use an in-service withdrawal today to purchase an annuity that guarantees you $50,000 a year starting 10 years from now, at age 70. Then, you continue saving. In 10 years, you use the $500,000 you’ve saved since your first annuity purchase to purchase a second annuity, this time looking for the payments to start immediately. Look for whatever annual payment amount gets you to your retirement income goals, and then make sure it comes with an annual increase of 3 to 5 percent.
When it makes sense
In our example, making those decisions today would mean that starting ten years from now you would get $50,000 per year plus whatever the monthly payment is of your second annuity. You’d also secure an annual increase to your retirement income. Plus, if the second annuity costs less than the full $500,000, you’d have money left over to spend or invest further.
You’re also reducing your risk should the stock market fall from ages 60 to 70, since you used your current $500,000 to lock-in a retirement income of $50,000 for life.
At the very least, we hope this shows you why it’s worth looking into whether your 401(k) plan has an in-service withdrawal feature.
A few things to keep in mind: This feature is only available once you turn 59 1/2 and using it doesn’t stop you from contributing to your 401(k). If you are concerned about creditor protection you may be better off leaving your money inside of the plan.
A financial advisor can help you evaluate the different options, and how an in-service withdrawal might be able to benefit you. The goal of considering an in-service withdrawal to expand your options for creating the retirement you envision. Just make sure you select an independent financial advisor that acts as a fiduciary and uses a transparent fee structure.