In-Service 401(k) Withdrawals and Income Planning

An option you can use to develop your retirement income plan while you work.
provided by Corby Kiss

Can you withdraw money from your 401(k) while you are still employed? Not everyone should; not everyone can. However, if you can, it may mean that you can effectively implement part of your retirement income plan before you retire.

If your 401(k) plan permits it, you can take an in-service withdrawal and redirect some of your 401(k) funds into another investment vehicle that offers you income guarantees.

The reasons why. A non-hardship withdrawal can provide you with early access to a portion of your retirement assets, freeing you to manage them as you wish. If the mix of funds in your 401(k) have taken a big hit lately, you might be wondering how some of those assets would do in other kinds of investments, especially those with less risk exposure.

This very question has led some people to withdraw assets from qualified retirement plans such as 401(k)s and direct them into non-qualified annuities that they own independently. A non-qualified annuity contract may be structured to provide tax-deferred growth for retirement, or immediate income. You aren’t even required to take distributions at age 70½ (though your contributions aren’t tax deductible.) The annuity may be fixed or variable. Another nice feature: non-qualified annuities do not have annual contribution limits. (There are annual contribution limits on qualified annuities held within IRAs and employer-sponsored retirement plans.)1

Today, you can find popular non-qualified annuity investments that will allow you to take advantage of stock market gains while protecting your principal against stock market losses. Many of them offer the option of guaranteed lifelong income payments. Some of these annuities may let you allocate assets across a mix of stocks, bonds and funds through subaccounts.2

With features like these, you may be interested in these kinds of investments if you are approaching retirement age.

The 72(t) strategy to avoid the early withdrawal penalty. If you are still working and pull money out of your 401(k) before age 59½, you will almost certainly pay a 10% early withdrawal penalty plus income taxes on the money you take out.3 But you might be able to make early withdrawals with the help of IRS Rule 72(t).

Rule 72(t), based on life expectancy, lets you schedule fixed income withdrawals for five years or until you reach 59-1/2, whichever is longer.4 It lets you receive fixed, equal payments according to IRS calculations.

First things first: make sure you can do this. Talk with your employee benefits officer at work, and see that the Summary Plan Description (SPD) permits non-hardship withdrawals. Talk with your financial or tax advisor to make sure it is an appropriate move for you given your overall financial plan. If you know you’ll need more retirement income, there can be real merit to reinvesting early withdrawals from a 401(k) in vehicles that generate it.

Corby Kiss is a Representative with Harbour Investments and may be reached at, 269-629-5410 or

These are the views of Peter Montoya Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.



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