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What Is an in-Service Distribution?

Esther Ejim
Esther Ejim

Most employees have some sort of retirement package that they will gain at the end of their legal working life, which is usually due once they reach the age of retirement. This may come from the employer or from other sources that include the government. The common denominator, however, is the fact that the employees will not gain benefits until they have reached the stipulated terms within the contract guiding such. Many companies offer some kind of retirement plan for their employees to obtain once they fulfill certain requirements that must have been included in the service contract or contract of employment between that company and the employee under consideration. Sometimes, employees may need to use a part of the money before reaching that age, in which case they can apply for an in-service distribution or withdrawal of a portion of their retirement benefit for purposes related to the situation at the time of the request for withdrawal.

A reason why an employee could ask for an an in-service distribution could be due to a personal issue, such as financial difficulties where these funds will help the employee to alleviate the hardship. For instance, an employee who may have family members experiencing some financially draining health issues could ask for an in-service withdrawal while still employed by the company as a means to fund the treatments for the health problem. The employee could also ask for an in-service distribution if the employee has an immediate need for the money for some other purpose, such as for the sake of investing it in a lucrative deal. In such a case, the employee will use the money obtained from the in-service withdrawal application for something like purchasing stock options.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

In most cases, the request for an in-service distribution by an employee does not go without some form of sanction, as a means of warding off rampant requests by employees for this sort of withdrawal. Most companies find it draining to pay the pension of their retiring workers, and they would prefer to reap the maximum human capital benefit from such an employer before they have to pay the retirement benefits. To this end, they frown on the application for an in-service distribution by their employees and other sanctions, such as the payment of taxes that will also apply to these funds.

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