Can You Withdraw From Your Pension While Still Employed?

Accessing funds from a retirement savings plan while still employed can be a complex matter. While these plans are primarily designed to foster savings for post-employment years, certain situations may permit individuals to access their accumulated funds before retirement or separation from service. The specific regulations and conditions for such withdrawals vary considerably, depending on the type of retirement plan and its particular provisions.

Types of Workplace Retirement Plans

Workplace retirement plans fall into two broad categories: Defined Benefit Plans and Defined Contribution Plans. Understanding the distinctions between these plans is important for determining potential withdrawal options.

Defined Benefit Plans, often referred to as traditional pensions, promise a specific payout at retirement, typically based on factors like salary history and years of service. In-service withdrawals from these plans are generally rare and highly restricted, often limited to specific, pre-defined plan provisions such as reaching a certain age while still employed but prior to the plan’s normal retirement age. For instance, some plans may permit distributions at age 59½, though this is an optional provision for the plan sponsor.

Defined Contribution Plans, such as 401(k)s, 403(b)s, and 457(b)s, are more likely to offer in-service withdrawal options. These plans involve contributions made by the employee, the employer, or both, which are then invested, with the retirement benefit depending on the investment performance. While specific rules vary by plan, these accounts generally offer more flexibility for accessing funds before leaving employment. The rules for withdrawing employee contributions may differ from those for employer contributions, with employee deferrals often having more stringent withdrawal conditions before certain ages.

Permissible In-Service Withdrawal Conditions

Accessing funds from a workplace retirement plan while still employed is permitted under specific circumstances, often outlined by Internal Revenue Service (IRS) regulations and individual plan documents. One common condition allows for withdrawals after an individual reaches age 59½. For most defined contribution plans, distributions taken after this age are generally not subject to the early withdrawal penalty, although they remain taxable.

Another pathway for accessing funds is through hardship withdrawals, which are permitted for an “immediate and heavy financial need.” The IRS defines several qualifying events for these withdrawals, including:
Medical expenses for the employee, spouse, or dependents.
Costs directly related to the purchase of a principal residence (excluding mortgage payments).
Tuition and related educational fees for the next 12 months of post-secondary education.
Payments to prevent eviction from or foreclosure on a primary residence.
Funeral expenses.
Certain expenses for the repair of damage to a primary residence that would qualify for a casualty deduction.
Hardship withdrawals are typically limited to the amount necessary to satisfy the financial need and often require proof of such need.

Beyond age-based and hardship distributions, some plans may offer other in-service non-hardship distributions. These can include withdrawals from specific contribution types, such as after-tax contributions or rollover contributions, which may be accessible at any time regardless of age or financial hardship. Some plans might also allow access to funds after a certain number of years of participation or upon reaching a specified age, such as age 62 or 65. While not a withdrawal, plan loans are another way to access funds temporarily, allowing individuals to borrow from their account and repay it with interest, usually over a five-year period.

Tax Implications of In-Service Withdrawals

Taking an in-service withdrawal from a retirement plan carries significant tax implications that can diminish the amount received. Most distributions from pre-tax accounts are considered taxable income and are subject to federal income tax at the individual’s ordinary income tax rate. Depending on the individual’s state of residence, state income tax may also apply to the withdrawn amount.

For individuals under age 59½, an additional 10% early withdrawal penalty generally applies to the taxable portion of the distribution. However, several exceptions can waive this penalty. These exceptions include distributions made due to:
Total and permanent disability.
Certain unreimbursed medical expenses exceeding a percentage of adjusted gross income.
Qualified higher education expenses.
A first-time home purchase (up to $10,000).
Separation from service at or after age 55 (Rule of 55).
Substantially equal periodic payments (SEPPs).
Qualified birth or adoption expenses.
Certain disaster recovery distributions.
Domestic abuse distributions.

Plan administrators are typically required to withhold a percentage of the distribution for federal income tax. This mandatory federal withholding is usually 20% of the taxable amount, even if the individual intends to roll over the funds to another retirement account. If the full amount is not rolled over, the individual must account for the difference. For after-tax contributions, only the earnings on those contributions are taxable upon withdrawal, while the original contributions themselves are not.

Initiating an In-Service Withdrawal

Once eligibility for an in-service withdrawal has been determined and the tax consequences are understood, the process of initiating the withdrawal involves several procedural steps. The first action is to contact the plan administrator or human resources department. This initial contact is essential for understanding the specific options available under the employer’s plan, as rules can vary considerably.

The plan administrator will provide details on the available withdrawal options, eligibility criteria, and the necessary documentation. Individuals will need to obtain and accurately complete the required withdrawal request forms. These forms typically ask for personal details, the desired withdrawal amount, and instructions on how the funds should be disbursed, such as direct deposit or check.

For certain types of withdrawals, such as hardship distributions, supporting documentation will be necessary. This documentation might include medical bills, purchase agreements for a home, eviction notices, or other records that substantiate the stated financial need. The submission process for forms and documentation can vary, with options including online portals, mail, or fax.

After submission, individuals should anticipate a processing period, which can range from a few days to several weeks. Funds are typically disbursed directly to a bank account or via a mailed check. Following the distribution, the plan administrator will issue IRS Form 1099-R, “Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.,” by January 31 of the year following the withdrawal. This form reports the amount of the distribution and any taxes withheld, which is necessary for accurate tax filing.