An in-service withdrawal is a withdrawal from a retirement plan before retirement or a triggering event occurs. It may result in penalties or taxes, but can be waived for specific situations like paying for a child’s college tuition. The employee must meet ordering rules and be fully vested before requesting a withdrawal.
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 occurs that would normally allow withdrawals. Depending on the retirement plan structure and tax laws that may apply, choosing to make such a withdrawal may result in additional penalties or taxes that must also be paid as part of the withdrawal process. It’s not unusual for fines and taxes to be waived if the reason for retirement 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 individual retirement account, can only take place before withdrawals are possible due to some type of trigger event. An example of a trigger event would be the employee reaching an age that the employer defines as the early retirement age and any applicable government tax regulations. If the employee decides to resign and get a new job, this is also a triggering event that gives the employee the option of transferring the pension balance to a new plan or cashing it out.
In many situations, an employee may choose to take a service withdrawal as a means of dealing with a temporary cash flow problem. For example, if the employee sustained injuries that required a long recovery period, a withdrawal may be taken to cover basic expenses, such as covering monthly mortgage or rent payments. It is not unusual for parents to withdraw funds from a retirement plan as a means to pay for their children’s college tuition, when no other means are available to finance education. With many retirement plans, situations of this type allow the withdrawal to take place without the application of penalties. When the reason for the withdrawal does not fit a defined set of circumstances, penalties can be up to ten percent of the amount withdrawn.
To request and receive an in-service withdrawal, the employee must meet what are known as ordering rules or other criteria established by the plan administrator. Most plans require employees to be fully vested before any withdrawal request can be honored. Some plans require the employee to reach the earliest allowable retirement age before withdrawing funds from the plan. For example, if the plan allows retirement at age 59½, but the employee prefers to work until age 65, a 60-year-old employee can request an in-service retirement and continue working.
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