Broker Check
The Magic of Age 59 1/2 in 401(k) Plans

The Magic of Age 59 1/2 in 401(k) Plans

May 20, 2021

Age 59 ½


Age 59 ½ is an important age when it comes to retirement plans.  Here’s an idea if you have attained age 59 ½ or older, you are still working and your company has a 401(k) plan.


401(k) Plan Rules


There are a lot of rules when it comes to 401(k) plans.  There are rules for when you can start to invest in your company’s plan.  There are rules regarding the amount you can contribute.  There are top heavy rules, loan provisions, early withdrawal penalties, in service withdrawals, hardship distributions and more.  Here is one rule that I doubt many people are aware of and it could be very helpful if you are older than age 59 ½.


In-Service Distributions


What is an in-service distribution in a 401(k) plan?  This is a way for a participant to take distributions from their 401(k) plan without leaving the employ of their company.  Not all plans offer in-service distributions and if they do, they are usually for events like purchasing a first home or declaring a hardship.  You will need to check your plan’s document to see if they allow in-service distributions.  70% of plans offer these types of distributions.

There is one in-service distribution that every plan has to offer and that is an in-service distribution to anyone age 59 ½ and older.


What Happens at Age 59 ½?


If you are age 59 ½ or older, still working at your employer and have a 401(k) plan, you are able to make a penalty free withdrawal from your retirement plan even while remaining employed and it is not dependent on the plan offering in-service distributions. 

In English this means, if you are working at a company that offers a 401(k) plan and you are over the age of 59 ½, you can take a penalty free distribution from the plan.  Why would anybody want to do this?

With most 401(k) plans, there is a somewhat limited investment lineup from which to choose.  In addition, the participant does not get to choose the recordkeeper or even which funds are available in the plan.  Once you reach the age of 59 ½, a whole new opportunity is available to you.  After age 59 ½, you can roll over your 401(k) plan to an individual IRA.  This gives you the opportunity to choose from a much bigger lineup of investment choices.  To avoid any tax consequences, you will want to directly roll over the funds from the 401(k) plan into your IRA.  Remember, you can do this after age 59 ½ in-service withdrawal while you are still working at your company and continue to make 401(k) contributions as well.




Here are some of the advantages of taking an in-service distribution and rolling it into an IRA after age 59 ½.

  1. Access to a broader range of investment choices.
  2. Ability to receive professional advice on an individual basis.
  3. You might want to consolidate retirement assets.
  4. You have much more control over your investment choices.




I always ask, what’s the bad part?  Here are some reasons doing this in-service distribution might not make sense.

  1. Your employer’s 401(k) plan is very large and receives preferential pricing or fee reductions.
  2. You wish to defer required minimum distributions after age 72 if still employed.
  3. You reside in a state that provides no, or limited, creditor protection for IRAs.
  4. You wish to take advantages of features, like a loan provision that are only available within the retirement plan.


Final Thoughts


Getting old doesn’t always suck!  This is one time when there are some advantages.   If you are over the age of 59 ½, you might want to check out this opportunity to see if it works for you and your situation.  I recently helped one of my clients take a post age 59 ½ in-service distribution and roll that along with several other IRA plans into one IRA.  The size of this combined portfolio allowed us to work with a boutique money manager that required a high minimum investment.  They were able to build a custom investment portfolio that fit my client’s risk tolerance and time horizon.  In the future, when she goes from the accumulation phase to the distribution phase, it will be a seamless process and we can make sure she takes the correct amounts when she is required to take required distributions at age 72.


Reach Out


If this is something that might apply to you, feel free to give me a call or schedule a time to speak with me by clicking the, Get In Touch, button at the top of my website.  It’s difficult to discuss every possibility in a short blog post but I would be happy to speak with you and see if something like this makes sense for you.  As always, thanks for reading.  KB