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An in-service withdrawal is a withdrawal from a qualified retirement plan that takes place before the employee actually retires or some other triggering event that would normally allow withdrawals takes place. Depending on the structure of the retirement plan, and any tax laws that may apply, choosing to make a withdrawal of this type may incur penalties or additional taxes that must also be paid as part of the withdrawal process. It is not unusual for penalties and taxes to be waived if the reason for the in-service withdrawal has to do with specific situations, such as making house payments or paying a child’s college tuition.
This type of early distribution from a retirement fund, such as a pension plan or an individual retirement account, can only take place before withdrawals are possible due to some type of triggering event. An example of a triggering event would be the employee reaching an age that is defined as early retirement age by the employer and any prevailing governmental tax regulations. Should the employee choose to resign and secure new employment, this is also a triggering event that provides the employee with the option of rolling the balance of the pension into a new plan or cashing it out.
In many situations, an employee may choose to make an in-service withdrawal as a means of dealing with a temporary cash flow problem. For example, if the employee sustained injuries that required a lengthy period of recuperation, a withdrawal may be taken in order to meet basic expenses, such as covering monthly mortgage payments or rent. It is not unusual for parents to withdraw funds from a retirement plan as a means of paying college tuition for children, when no other means of funding the education are readily available. With many retirement plans, situations of this type do allow for the withdrawal to take place without the application of penalties. When the reason for the withdrawal does not fit into a defined set of circumstances, the penalties may be up to ten percent of the amount withdrawn.
In order to request and receive an in-service withdrawal, the employee must comply with what is known as ordering rules, or other criteria that is established by the plan administrator. Most plans require that employees be fully vested before any request for withdrawing funds can be honored. Some plans require that the employee reach the first retirement age allowed before withdrawing any funds from the plan. For example, if the plan allows for withdrawal at the age of 59 ½, but the employee prefers to work up to age 65, an employee who is 60 may request an in-service withdrawal, and continue working.