Rolling Over While Still Employed: 2025 In-Service Distribution Strategies Under SECURE 2.0
Introduction
Many workers find themselves trapped in high-fee 401(k) plans but hesitate to leave their current employer just to access better investment options. The good news? You don't have to quit your job to take control of your retirement savings. In-service distributions allow eligible employees to roll over portions of their 401(k) while still working for the same company, potentially saving thousands in fees over time.
The SECURE 2.0 Act has significantly expanded in-service distribution options, adding new provisions for emergencies, disasters, and other qualifying events. (Employee Fiduciary) These changes, combined with enhanced fiduciary protections under the 2024 Retirement Security Rule, create new opportunities for workers to optimize their retirement savings without changing jobs.
For the millions of Americans with forgotten or poorly managed 401(k) accounts, understanding these options has never been more critical. (Modest Money) This comprehensive guide will demystify in-service withdrawals, explore the latest SECURE 2.0 provisions, and provide practical steps to determine your eligibility and execute a successful rollover strategy.
Understanding In-Service Distributions: The Basics
What Are In-Service Distributions?
In-service distributions are withdrawals from your 401(k) plan while you're still employed by the sponsoring company. Unlike traditional rollovers that occur when you leave a job, these distributions allow you to move money from your current employer's plan to an IRA or another qualified retirement account without terminating employment.
The rules governing in-service distributions are complex and restrictive by design, intended to prevent employees from withdrawing retirement savings prematurely unless specific circumstances exist. (Employee Fiduciary) However, when available, they provide a powerful tool for optimizing your retirement portfolio.
Traditional In-Service Distribution Triggers
Before SECURE 2.0, in-service distributions were typically limited to:
• Age-based withdrawals: Many plans allow distributions after age 59½
• Hardship withdrawals: For immediate and heavy financial needs
• After-tax contributions: Rolling over after-tax 401(k) contributions to a Roth IRA
• Employer contributions: Some plans allow distribution of employer matching or profit-sharing contributions after a specified vesting period
The Fee Problem: Why In-Service Distributions Matter
High 401(k) fees can significantly erode retirement savings over time. Many employer-sponsored plans charge administrative fees, investment management fees, and other expenses that can total 1-2% annually or more. For a worker with a $100,000 balance, this could mean $1,000-$2,000 in fees each year.
Fintech platforms like Beagle Financial Services have emerged to help workers identify and escape these fee traps. (Crushing REI) By locating old 401(k) accounts and facilitating rollovers to low-cost IRAs, these services can help workers reduce fee drag and improve long-term returns.
SECURE 2.0: Expanding In-Service Distribution Options
New Emergency Withdrawal Provisions
The SECURE 2.0 Act introduced several new in-service distribution options that provide greater flexibility for 401(k) participants. (Employee Fiduciary) One of the most significant additions is the emergency withdrawal provision under Section 115.
This provision allows eligible participants to take one self-certified, penalty-free withdrawal of up to $1,000 per calendar year for unforeseeable or immediate financial needs relating to personal or family emergency expenses. (Plan Sponsor) Importantly, only one withdrawal per 3-year repayment period is permitted if the first withdrawal has not been repaid.
Additional SECURE 2.0 Distribution Categories
The legislation added several other new in-service distribution options:
• Disaster-related distributions: For federally declared disasters
• Terminal illness distributions: For participants diagnosed with terminal illnesses
• Domestic abuse distributions: For victims of domestic abuse
• Emergency savings distributions: From designated emergency savings accounts
• Long-term care premium distributions: To pay for qualified long-term care insurance
Implementation Timeline and Considerations
While SECURE 2.0 was enacted as part of the Consolidated Appropriations Act, 2023, many provisions have staggered implementation dates. (IRS Notice 2024-02) Plan sponsors are not required to adopt all new distribution options immediately, and some provisions are optional for small businesses to implement.
This means that availability of these new distribution types will vary by employer and plan. Workers interested in accessing these options should check with their plan administrator or HR department to understand which provisions their specific plan has adopted.
Age-Based In-Service Distributions: The 59½ Rule
Understanding the Age Threshold
The most common type of in-service distribution is the age-based withdrawal, typically available once participants reach age 59½. This age threshold aligns with the general rule that allows penalty-free withdrawals from retirement accounts, making it a natural trigger for in-service distributions.
Not all plans offer age-based in-service distributions, and those that do may have additional restrictions. Some plans only allow distributions of certain contribution types (such as employee deferrals but not employer matching), while others may require a minimum account balance or impose waiting periods.
Strategic Considerations for Age 59½ Distributions
For workers approaching or past age 59½, in-service distributions can be particularly valuable for:
• Fee reduction: Moving funds from high-fee 401(k) plans to low-cost IRAs
• Investment diversification: Accessing broader investment options not available in the employer plan
• Tax planning: Converting traditional 401(k) funds to Roth IRAs during lower-income years
• Estate planning: Consolidating retirement accounts for easier beneficiary management
Partial vs. Full Distributions
Many plans that offer age-based in-service distributions allow participants to take partial withdrawals rather than requiring a complete account liquidation. This flexibility enables workers to:
• Test the rollover process with a smaller amount first
• Maintain some funds in the employer plan if it offers unique benefits
• Gradually transition funds over time to minimize market timing risk
• Keep enough in the plan to continue receiving employer matching contributions
Hardship Withdrawals: Traditional Safety Valve
Qualifying Hardship Circumstances
Hardship withdrawals have long been available from 401(k) plans, but they come with strict requirements and limitations. The IRS defines hardship as an "immediate and heavy financial need" that cannot be satisfied through other means.
Traditional hardship circumstances include:
• Medical expenses for the participant, spouse, or dependents
• Purchase of a primary residence
• Tuition and educational expenses
• Prevention of eviction or foreclosure
• Burial or funeral expenses
• Certain expenses related to repairing damage to a primary residence
Hardship vs. Emergency Withdrawals Under SECURE 2.0
The new emergency withdrawal provision under SECURE 2.0 differs from traditional hardship withdrawals in several key ways:
• Self-certification: Emergency withdrawals can be self-certified, while hardship withdrawals typically require documentation
• Penalty treatment: Emergency withdrawals up to $1,000 are penalty-free, while hardship withdrawals may still incur the 10% early withdrawal penalty
• Repayment options: Emergency withdrawals can be repaid to the plan, while hardship withdrawals generally cannot
• Frequency limits: Emergency withdrawals are limited to once per three-year period (unless repaid), while hardship withdrawals may be available more frequently
Documentation and Approval Process
Traditional hardship withdrawals require extensive documentation and plan administrator approval. Participants must typically provide:
• Proof of the qualifying expense
• Evidence that the amount requested does not exceed the financial need
• Certification that other resources are not available
• Acknowledgment of tax consequences and penalties
This process can take weeks or months, making hardship withdrawals less suitable for truly urgent financial needs.
Fiduciary Protections Under the 2024 Retirement Security Rule
Enhanced Fiduciary Standards
The 2024 Retirement Security Rule strengthened fiduciary protections for retirement plan participants, including those considering in-service distributions. These enhanced standards require plan fiduciaries to act solely in the best interests of participants and beneficiaries when providing investment advice or recommendations.
For workers considering in-service distributions, these protections mean:
• Objective advice: Fiduciaries must provide advice that serves the participant's best interests, not the advisor's financial interests
• Fee transparency: Enhanced disclosure requirements for fees and potential conflicts of interest
• Suitable recommendations: Advice must be appropriate for the participant's individual circumstances
Impact on Rollover Recommendations
The enhanced fiduciary standards particularly impact rollover recommendations. Financial advisors and plan administrators must now consider:
• Comparative fees between the current plan and proposed IRA
• Investment options and their quality in both accounts
• Services and features available in each option
• Participant's individual financial situation and needs
This means workers should receive more objective guidance when considering in-service distributions, though they should still conduct their own due diligence.
Working with Financial Concierge Services
Services like Beagle Financial Services position themselves as financial concierges for retirement savers, helping to navigate the complex landscape of 401(k) management and rollovers. (Crushing REI) These platforms can help workers understand their options and execute rollovers, but participants should ensure any advice received meets the enhanced fiduciary standards.
Practical Steps: Checking Your Plan Documents
Locating Your Plan Documents
The first step in determining your in-service distribution eligibility is reviewing your plan documents. These critical documents outline the specific rules and options available in your employer's 401(k) plan.
Plan documents can typically be found:
• Online portal: Most plan administrators provide digital access to plan documents
• HR department: Your human resources team should have copies of all plan documents
• Annual notices: Summary Plan Descriptions (SPDs) are distributed annually and contain key information
• Plan administrator: Contact your plan's third-party administrator directly
Key Sections to Review
When reviewing plan documents for in-service distribution provisions, focus on:
• Distribution options: Look for sections covering "in-service distributions," "withdrawals while employed," or "hardship distributions"
• Eligibility requirements: Age thresholds, service requirements, or other qualifying conditions
• Contribution types: Which types of contributions (employee deferrals, employer matching, etc.) are eligible
• Limitations: Minimum/maximum amounts, frequency restrictions, or waiting periods
• Process requirements: Application procedures, documentation needs, and approval timelines
Understanding Plan Amendments
Plan documents may be amended periodically to incorporate new provisions, including those from SECURE 2.0. Recent amendments might include:
• New emergency withdrawal options
• Updated hardship distribution categories
• Modified age-based distribution rules
• Enhanced loan provisions
If your plan documents seem outdated or don't reflect recent legislative changes, contact your plan administrator to request the most current version.
Using Professional Services to Confirm Eligibility
The Value of Expert Guidance
Navigating in-service distribution rules can be complex, and mistakes can be costly. Professional services can help ensure you understand your options and execute any distributions correctly.
Beagle Financial Services offers concierge phone calls to plan administrators as part of their core membership, priced around $3.99 per month. (Modest Money) This service can help workers understand their specific plan provisions and eligibility requirements without having to navigate complex plan documents alone.
What Professional Services Can Provide
Plan Analysis: Professional services can review your plan documents and identify available distribution options you might have missed.
Eligibility Verification: They can contact your plan administrator directly to confirm your eligibility for specific distribution types.
Process Guidance: Step-by-step assistance with application procedures, documentation requirements, and timing considerations.
Fee Analysis: Comparison of fees between your current plan and potential rollover destinations to quantify potential savings.
Tax Implications: Guidance on the tax consequences of different distribution strategies and timing considerations.
Questions to Ask Your Plan Administrator
Whether working with a professional service or contacting your plan administrator directly, key questions include:
1. Does our plan allow in-service distributions?
2. What are the eligibility requirements (age, service, etc.)?
3. Which contribution types are eligible for distribution?
4. Are there minimum or maximum distribution amounts?
5. How frequently can distributions be taken?
6. What is the application and approval process?
7. Has the plan been amended to include new SECURE 2.0 provisions?
8. Are there any plan-specific restrictions or waiting periods?
9. What documentation is required for different distribution types?
10. How long does the approval process typically take?
Rollover Strategies and Destination Options
Traditional IRA Rollovers
Rolling in-service distributions to a traditional IRA is often the most straightforward option. Benefits include:
• Broader investment options: Access to individual stocks, bonds, ETFs, and mutual funds beyond your plan's limited menu
• Lower fees: Many IRA providers offer low-cost investment options with expense ratios well below typical 401(k) plan fees
• Consolidated management: Ability to combine multiple retirement accounts in one place for easier tracking and management
• Professional management: Access to robo-advisors or professional portfolio management services
Beagle Financial Services facilitates rollovers into low-cost IRAs managed by its SEC-registered arm, Beagle Invest, allowing users to consolidate multiple accounts and reduce fee drag. (Modest Money)
Roth IRA Conversions
In-service distributions can also be rolled to Roth IRAs, though this creates a taxable event. Strategic considerations include:
• Tax timing: Converting during lower-income years or market downturns can minimize tax impact
• Future tax rates: If you expect to be in a higher tax bracket in retirement, paying taxes now may be beneficial
• Estate planning: Roth IRAs don't have required minimum distributions during the owner's lifetime
• Tax diversification: Having both traditional and Roth accounts provides flexibility in retirement
Self-Directed IRA Options
For sophisticated investors, self-directed IRAs offer the broadest investment options, including:
• Real estate investments
• Private equity and hedge funds
• Precious metals
• Cryptocurrency (where permitted)
• Private lending
However, self-directed IRAs require more active management and carry additional risks and compliance requirements.
Keeping Some Funds in the Employer Plan
Not all in-service distributions require complete account liquidation. Reasons to maintain some funds in your employer plan might include:
• Employer matching: Continuing to receive matching contributions on ongoing deferrals
• Unique investment options: Access to institutional share classes or specialized funds not available elsewhere
• Loan provisions: Ability to borrow against remaining 401(k) balance if needed
• Creditor protection: 401(k) plans generally offer stronger creditor protection than IRAs
Tax Implications and Timing Considerations
Understanding Tax Treatment
The tax implications of in-service distributions vary depending on the type of distribution and destination:
Direct rollovers to traditional IRAs are generally not taxable events, preserving the tax-deferred status of your retirement savings.
Roth conversions create immediate taxable income equal to the amount converted, but future growth and distributions are tax-free.
Cash distributions are subject to ordinary income tax plus potential early withdrawal penalties if you're under age 59½.
Timing Strategies
Strategic timing of in-service distributions can minimize tax impact:
• Year-end planning: Taking distributions in December allows for better tax planning and potential estimated tax payments
• Income smoothing: Spreading large distributions across multiple tax years can avoid pushing you into higher tax brackets
• Market timing: While generally not recommended, some investors time distributions to coincide with market downturns for Roth conversions
• Retirement transition: Taking distributions during the gap between retirement and Social Security/Medicare eligibility when income may be lower
Required Minimum Distribution Considerations
While in-service distributions don't directly trigger required minimum distributions (RMDs), they can affect your overall RMD strategy:
• IRA aggregation: Funds rolled to IRAs will be subject to RMD rules starting at age 73
• 401(k) still-working exception: If you're still working past age 73, funds left in your current employer's 401(k) may not be subject to RMDs
• Roth conversion opportunities: In-service distributions provide opportunities for Roth conversions before RMDs begin
Common Pitfalls and How to Avoid Them
Documentation and Record-Keeping
Poor documentation is one of the most common pitfalls in executing in-service distributions:
Maintain detailed records of all distribution requests, approvals, and transactions.
Keep tax documents including 1099-R forms and any withholding statements.
Document rollover timing to ensure compliance with 60-day rollover rules if applicable.
Track basis in after-tax contributions to avoid double taxation.
Timing Mistakes
Timing errors can result in unnecessary taxes or penalties:
Missing deadlines: Some distribution types have specific timing requirements or windows.
Incomplete rollovers: Failing to roll over the entire distribution amount within 60 days can result in taxable income and penalties.
Withholding issues: Mandatory withholding on distributions can complicate rollover completion if not properly planned.
Plan-Specific Restrictions
Each plan has unique rules that can create unexpected limitations:
Contribution source restrictions: Some plans only allow distributions from certain types of contributions.
Waiting periods: Plans may impose waiting periods between distributions or after certain events.
Minimum balance requirements: Some plans require maintaining minimum account balances.
Employment status changes: Job changes or leaves of absence can affect distribution eligibility.
Professional Guidance Benefits
Working with experienced professionals can help avoid these common pitfalls. Services like Beagle Financial Services have helped people from major companies like Google, Walmart, Uber, and Ford with their financial management when switching companies. (Crushing REI) Their expertise in navigating plan-specific rules and distribution procedures can be invaluable.
Technology Solutions for Account Management
Digital Platforms and Tools
Modern technology has made managing retirement accounts and executing rollovers significantly easier. Digital platforms offer:
Account aggregation: View all retirement accounts in a single dashboard for better oversight and management.
Fee analysis: Automated tools that calculate and compare fees across different account types and providers.
Rollover automation: Streamlined processes that handle much of the paperwork and coordination required for rollovers.
Real-time tracking: Monitor account balances, performance, and fee impacts in real-time.
Beagle Financial Services allows users to store all their money in one place and unlock old 401(k) accounts for use prior to retirement, providing comprehensive visibility over retirement assets. (Crushing REI)
Automated Rollover Services
Several fintech companies now offer automated rollover services that can:
• Identify eligible accounts for rollover
• Handle paperwork and coordination with plan administrators
• Execute direct rollovers to minimize tax implications
• Provide ongoing account management and investment advice
These services can be particularly valuable for workers with multiple old 401(k) accounts from previous employers, as there are over 29 million forgotten 401k accounts worth more than $1.6 trillion. (Modest Money)
Mobile Apps and Accessibility
Mobile applications have made retirement account management more accessible:
• Real-time monitoring: Check account balances and performance on the go
• Document upload: Submit required paperwork through mobile apps
• Customer support: Access to chat or phone support directly through mobile interfaces
• Educational resources: Access to retirement planning tools and educational content
Future Outlook: What's Coming Next
Pending SECURE 2.0 Provisions
While many SECURE 2.0 provisions are already in effect, several additional changes are scheduled for future implementation:
Automatic enrollment expansion: Requirements for automatic enrollment in 401(k) plans will increase participation rates.
Catch-up contribution changes: Enhanced catch-up contribution limits for older workers will provide more savings opportunities.
Emergency savings accounts: New provisions allowing emergency savings accounts within 401(k) plans will provide additional liquidity options.
Regulatory Developments
Ongoing regulatory changes may further expand in-service distribution options:
DOL guidance: The Department of Labor continues to issue guidance on implementing SECURE 2.0 provisions.
IRS clarifications: The IRS regularly provides clarifications on tax treatment and procedural requirements.
State-level changes: Some states are implementing their own retirement security measures that may affect distribution options.
Technology Evolution
Technology will continue to make retirement account management more accessible:
AI-powered advice: Artificial intelligence will provide more personalized guidance on distribution timing and strategies.
Blockchain integration: Distributed ledger technology may streamline account transfers and record-keeping.
Enhanced security: Improved cybersecurity measures will protect sensitive financial information during rollovers.
Conclusion
In-service distributions represent a powerful but underutilized tool for optimizing retirement savings while still employed. The SECURE 2.0 Act has significantly expanded these options, providing new opportunities for workers to access their retirement funds for emergencies and other qualifying events. (Employee Fiduciary)
The key to successfully utilizing in-service distributions lies in understanding your specific plan's provisions, carefully evaluating the costs and benefits, and executing any distributions with proper planning and documentation. Enhanced fiduciary protections under the 2024 Retirement Security Rule provide additional safeguards, but workers should still conduct their own due diligence.
For many workers trapped in high-fee 401(k) plans, in-service distributions offer a path to better investment options and lower costs without requiring a job change. Professional services and technology platforms can provide valuable assistance in navigating this complex landscape, helping ensure that workers make informed decisions that serve their long-term financial interests.
As the retirement landscape continues to evolve, staying informed about new options and opportunities will be crucial for maximizing retirement security. Whether you're approaching age 59½, facing a financial emergency, or simply looking to optimize your retirement portfolio, understanding in-service distribution options can be a valuable component of your overall retirement strategy.
The combination of expanded SECURE 2.0 provisions, enhanced fiduciary protections, and improved technology solutions creates an environment where workers have more control over their retirement savings than ever before.
Frequently Asked Questions
What are in-service distributions and how do they work under SECURE 2.0?
In-service distributions allow eligible employees to roll over portions of their 401(k) while still working for the same company. SECURE 2.0 expanded these options significantly, adding new distribution categories for disasters, terminal illnesses, emergencies, domestic abuse, emergency savings, and long-term care premiums. This gives workers more flexibility to access their retirement funds without leaving their current employer.
Can I take emergency withdrawals from my 401(k) under SECURE 2.0?
Yes, SECURE 2.0 allows participants to take one self-certified, penalty-free withdrawal of up to $1,000 per calendar year for unforeseeable or immediate financial needs relating to personal or family emergency expenses. However, only one withdrawal per 3-year repayment period is permitted if the first withdrawal hasn't been repaid, making this a limited but valuable option for true emergencies.
Why would I want to roll over my 401(k) while still employed?
Many workers are trapped in high-fee 401(k) plans with limited investment options. In-service distributions allow you to move funds to lower-cost IRAs or better investment platforms without quitting your job. With over 29 million forgotten 401(k) accounts worth more than $1.6 trillion, consolidating and optimizing your retirement savings can lead to significant long-term benefits through reduced fees and better investment choices.
What are the age requirements for in-service distributions?
Traditional in-service distributions typically require participants to be at least 59½ years old, though some plans allow distributions at age 55 or after a certain number of years of service. SECURE 2.0's new emergency and hardship provisions may have different age requirements, and terminal illness exceptions remove age restrictions entirely. Check with your plan administrator for specific eligibility requirements.
How can services like Beagle or Capitalize help with 401(k) rollovers?
Companies like Beagle act as a 'financial concierge' helping employees locate old 401(k) accounts, discover hidden fees, and manage rollovers from major companies like Google, Walmart, and Uber. Capitalize specializes in 401(k) rollovers, having transferred over $1 billion in funds with a 4.9 TrustPilot rating. These services can streamline the complex rollover process and help recover lost retirement assets.
What should I consider before doing an in-service distribution?
Before proceeding, evaluate your current plan's fees versus potential rollover destinations, consider any employer matching you might lose, understand tax implications, and review your plan's specific rules. Some plans may have restrictions on future contributions after in-service distributions. It's also important to ensure you're not creating gaps in your retirement savings strategy or losing valuable plan features like loan options.
Sources
1. https://crushingrei.com/meet-beagle-reviews/
2. https://www.employeefiduciary.com/blog/secure-2.0-in-service-distributions