Could an In-Service Distribution From Your 401(k) Work for You?
If your company plan allows it, you could expand your investing opportunities, but be careful of tax and early-withdrawal implications.


Properly implemented, an in-service distribution could be a worthwhile money move to consider, allowing you financial flexibility rarely associated with most retirement accounts. But how do you know if this financial strategy is right for you?
What is an in-service distribution?
An in-service distribution allows an employee with a company-sponsored 401(k) plan to make a withdrawal or rollover from that plan while they are still employed by that company. The specific rules and eligibility surrounding an in-service distribution can vary depending on the retirement plan and the employer’s policies, but most 401(k) retirement accounts don’t allow early withdrawals until age 59½. It’s around this age that most people are coming down the home stretch toward retirement.
401(k) limitations
Most 401(k) accounts don't have individual stock positions, and the investment choices offered are often geared toward the average investor and younger employees, which means your investment options are limited.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
A target-date fund is a popular choice among employees for their 401(k) account. These funds are a set-it-and-forget-it approach to investing, containing a select group of stocks, bonds and mutual funds designed to manage risk while helping you grow your savings based on your retirement timeline. The portfolio automatically rebalances for risk according to your predetermined retirement date.
If you have a specific investment option outside of your retirement account that you believe will generate higher returns than your current retirement plan options, an in-service distribution can allow you to capitalize on that opportunity.
Diversification of assets
If a significant portion of your retirement savings is tied up in an employer-sponsored plan, an in-service distribution can enable you to invest in other asset classes or financial instruments, reducing the risk associated with having all of your eggs tied up in one basket.
Employees gain the freedom to explore a wide range of investment options that might not be available within their current retirement plan. This newfound flexibility can be especially beneficial for those with unique circumstances or specific financial goals. The world is your oyster!
For example, while many 401(k)s predominantly offer mutual funds, which may carry hidden costs and fees, an IRA allows you to invest in individual stocks, exchange-traded funds (ETFs) with low expense ratios, bonds and other tax-free growth positions. Investing becomes more accessible, putting the individual in control of their financial future.
Tax implications
While emergency withdrawals from a 401(k) are usually allowed, rolling over funds through an in-service distribution eliminates the ability to take a loan from that IRA.
Despite the potential benefits, it’s essential to exercise caution before opting for an in-service distribution. Consider tax implications, early withdrawal penalties and the impact on your long-term retirement plans.
Consult with a financial adviser to assess the suitability of an in-service distribution based on your specific circumstances and financial goals.
Risk tolerance
Many people are not fully aware of their risk tolerance and may base their choices solely on past returns. This is where the expertise of a financial adviser becomes invaluable. A skilled adviser can help individuals assess their risk tolerance accurately, align their investments accordingly and ensure their portfolio is adequately diversified.
An in-service distribution allows individuals to diversify their holdings and reduce exposure to the potential failure of any one company. Many companies now offer this option, and employees should seize the opportunity to diversify their investment holdings.
By exploring investment options beyond the confines of a 401(k), individuals can make well-informed choices that align with their unique financial circumstances. Consulting a financial adviser is a wise step toward creating a comprehensive plan and making the most of the opportunities provided by an in-service distribution.
Remember, knowledge is key, and seeking out options like an in-service distribution can make a difference in securing your financial freedom in retirement.
related content
- Four 401(k) Mistakes to Avoid While Saving for Retirement
- 401(k) Plans: 10 Things You Should Know
- The Problem With 401(k) Catch-Up Contributions for 2024
- How to Find the Best 401(k) Investments
- What Is an ETF? Nine Things to Know About Exchange-Traded Funds
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

John Conley has more than 25 years of experience in the financial industry. As a fiduciary adviser at Rubino & Liang Wealth Partners, John helps his clients with retirement planning, asset accumulation, college funding and retirement income solutions. He holds Series 6, 63 and 65 licenses and is a registered life adviser in MA, NH, RI and FL. Before entering the financial industry, John served in the United States Marine Corps from 1990-1994 and achieved the rank of corporal non-commissioned officer.
-
Here's Why Walmart Deals are Better Than Amazon Prime Day
With sales for Walmart Deals and Amazon Prime Day running comparable on price, one factor separates them.
-
How to Get Rid of the Things Your Kids Don't Want While Downsizing
Whether moving by necessity or choice, downsizing means deciding what to do with your stuff. Here's what to do if the kids and grandkids don't want it all.
-
Five Things You Can Learn From Jimmy Buffett's Estate Dispute
The dispute over Jimmy Buffett's estate highlights crucial lessons for the rest of us on trust creation, including the importance of co-trustee selection, proactive communication and options for conflict resolution.
-
I'm a Financial Adviser: For True Diversification, Think Beyond the Basic Stock-Bond Portfolio
Amid rising uncertainty and inflation, effective portfolio diversification needs to extend beyond just stocks and bonds to truly manage risk.
-
I'm a Retirement Psychologist: Money Won't Buy You Happiness in Your Life After Work
While financial security is crucial for retirement, the true 'retirement crisis' is often an emotional, psychological and social one. You need a plan beyond just money that includes purpose, structure and social connection.
-
Retiring Early? This Strategy Cuts Your Income Tax to Zero
When retiring early, married couples can use this little-known (and legitimate) strategy to take a six-figure income every year — tax-free.
-
Ditch the Golf Shoes: Your Retirement Needs a Side Gig
A side gig in retirement can help combat boredom, loneliness and the threat of inflation eroding your savings. And the earlier you start planning, the better.
-
Roth IRA Conversions in the Summer? Why Now May Be the Sweet Spot
Converting now would enable you to spread a possible tax hit over more than one payment while reducing future taxes.
-
Investing Professionals Agree: Discipline Beats Drama Right Now
Big portfolio adjustments can do more harm than good. Financial experts suggest making thoughtful, strategic moves that fit your long-term goals.
-
'Doing Something' Because of Volatility Can Hurt You: Portfolio Manager Recommends Doing This Instead
Yes, it's hard, but if you tune out the siren song of high-flying sectors, resist acting on impulse and focus on your goals, you and your portfolio could be much better off.