In-Service Distributions

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on July 11, 2023

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What Are In-Service Distributions?

In-service distributions refer to withdrawals of money or assets from a retirement account by an employee who is still employed by the same company.

These distributions are allowed under certain circumstances, such as when the employee reaches a certain age or has a financial hardship.

In the context of employer-sponsored retirement plans such as 401(k) or 403(b) plans, in-service distributions can be a useful tool for employees who need access to funds while still employed.

However, they may also have negative consequences, such as reducing the amount of money available for retirement and incurring penalties or taxes.

It is important for employees to carefully consider their financial situation and consult with a financial advisor before making any decisions about in-service distributions from their retirement accounts.

Types of Retirement Plans Allowing In-Service Distributions

401(k) Plans

These employer-sponsored retirement plans allow employees to save and invest a portion of their income before taxes are taken out. In some cases, these plans permit In-Service Distributions.

403(b) Plans

Like 401(k) plans, 403(b) plans are designed for employees of public schools, non-profit organizations, and certain ministers. They may also allow In-Service Distributions under specific circumstances.

457(b) Plans

These non-qualified, deferred compensation plans are meant for state and local government employees and some non-governmental organizations. 457(b) plans may also offer In-Service Distributions.

Other Qualified Retirement Plans

Some other qualified retirement plans may also permit In-Service Distributions, depending on the specific plan's provisions and guidelines.

Eligibility Criteria for In-Service Distributions

Age Requirements

Typically, employees must be at least 59½ years old to be eligible for In-Service Distributions. However, some plans may have different age criteria.

Hardship Criteria

In certain situations, employees may qualify for In-Service Distributions if they face financial hardship, such as unexpected medical expenses, funeral costs, or expenses related to natural disasters.

Length of Service

Some plans may require a minimum length of service before allowing In-Service Distributions.

Plan-Specific Requirements

Each retirement plan may have unique requirements for In-Service Distributions. It is essential to review the plan documents to understand the specific criteria.

Eligibility Criteria for In-Service Distributions

Types of In-Service Distributions

Age-Based Distributions

These distributions are based on the employee's age, typically starting at 59½ years.

Hardship Withdrawals

Employees facing financial hardship may be eligible for hardship withdrawals, provided they meet the plan's criteria.

Loans From Retirement Plans

Some plans allow employees to borrow money from their retirement accounts. These loans usually have specific repayment terms and interest rates.

Other Plan-Specific Distribution Options

Retirement plans may have additional distribution options based on the plan's provisions and guidelines.

Types of In-Service Distributions

Tax Implications and Penalties

Taxation of In-Service Distributions

In-Service Distributions are generally subject to ordinary income tax and, in some cases, early distribution penalties.

Ordinary Income Tax

The distribution amount is usually added to the employee's annual taxable income, and taxes are paid at the employee's ordinary income tax rate.

Early Distribution Penalties

If the employee is under 59½ years old, a 10% early distribution penalty may apply, unless an exception is met.

Rollover Options to Minimize Tax Impact

Employees can consider rollover options to minimize the tax impact of In-Service Distributions.

Direct Rollovers

A direct rollover involves transferring the distribution amount directly to another qualified retirement plan or an IRA, avoiding immediate tax consequences.

Indirect Rollovers

An indirect rollover requires the employee to receive the distribution and then deposit it into another qualified plan or IRA within 60 days. However, a mandatory 20% withholding tax may apply, which must be compensated by the employee.

Loan Repayments and Tax Implications

Retirement plan loans usually have tax implications if they are not repaid on time or if the employee defaults. In such cases, the outstanding loan balance is considered a taxable distribution and may be subject to income taxes and early distribution penalties.

Strategies to Minimize Tax Impact

Employees can explore various strategies to minimize the tax impact of In-Service Distributions, such as timing the distribution, using rollover options, and consulting with tax professionals.

Advantages and Disadvantages of In-Service Distributions


Immediate Financial Relief

In-Service Distributions can provide immediate financial relief to employees facing financial hardships or needing funds for specific life events.

Access to Funds for Specific Life Events

Depending on the plan's provisions, these distributions can be used for essential expenses such as education, medical bills, or buying a home.

Potential for Improved Investment Options

In-Service Distributions allow employees to access better investment options by rolling over the funds into an IRA or another retirement plan.


Potential Tax Penalties

In-Service Distributions can result in tax penalties if not managed correctly, especially in the case of early distributions or defaulted loans.

Reduction in Retirement Savings

Withdrawing funds from retirement accounts may reduce the overall retirement savings and impact long-term financial goals.

Impact on Long-Term Financial Goals

In-Service Distributions may hinder retirement savings growth, affecting an employee's ability to achieve their long-term financial goals.

Advantages and Disadvantages of In-Service Distributions

Alternatives to In-Service Distributions

Emergency Funds

Having an emergency fund can help employees cover unexpected expenses without tapping into their retirement accounts.

Personal Loans

Personal loans can be another option to cover financial needs, as they generally have lower interest rates than credit cards.

Home Equity Lines of Credit

For homeowners, a home equity line of credit (HELOC) can provide access to funds based on the equity in their homes.

Other Personal Financial Resources

Employees can explore other personal financial resources, such as savings accounts, investments, or assistance from friends and family, before considering In-Service Distributions.

Regulations for In-Service Distributions

IRS Rules Governing In-Service Distributions

The Internal Revenue Service (IRS) has specific rules governing In-Service Distributions, including eligibility criteria, taxation, and reporting requirements.

ERISA Regulations

The Employee Retirement Income Security Act (ERISA) provides guidelines for retirement plans and their provisions, including In-Service Distributions.

Plan-Specific Rules and Restrictions

Each retirement plan may have its own rules and restrictions regarding In-Service Distributions, which both employers and employees must follow.

Reporting Requirements for Employers and Employees

Employers and employees must adhere to reporting requirements for In-Service Distributions, including providing accurate information on tax forms and plan documents.

Best Practices for Managing In-Service Distributions

Planning for Potential Financial Needs

Employees should plan for potential financial needs by building emergency funds, evaluating insurance options, and managing debt effectively.

Evaluating Alternatives to In-Service Distributions

Before considering In-Service Distributions, employees should explore alternative financial resources to cover their immediate needs.

Understanding Tax Implications and Strategies

Employees should be aware of the tax implications and strategies to minimize the tax impact of In-Service Distributions.

Regularly Reviewing Retirement Plan Performance

Employees should regularly review their retirement plan's performance to ensure they are on track to achieve their long-term financial goals.


In-service distributions refer to the ability of employees to withdraw money or assets from their employer-sponsored retirement plans, such as 401(k), 403(b), or 457(b) plans, under certain circumstances while still being employed by the same company.

The eligibility criteria for in-service distributions may vary depending on factors such as age, length of service, hardship criteria, and plan-specific requirements.

In-service distributions can provide immediate financial relief for employees facing financial hardships or needing funds for specific life events.

However, they may also have negative consequences, such as reducing the amount of money available for retirement and incurring penalties or taxes.

Employees should carefully consider their financial situation and explore alternatives before making any decisions about in-service distributions.

Employers and employees must adhere to IRS and ERISA regulations governing in-service distributions, as well as plan-specific rules and reporting requirements.

Regularly reviewing the retirement plan's performance can help employees stay on track to achieve their long-term financial goals.

In-Service Distributions FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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