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Should you tap your retirement account prior to retiring?

June 13, 2022
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This article is for long-time employees nearing traditional retirement age with large retirement balances, who have other financial concerns to address. It is common for employees of academia, especially professors and researchers to work long past traditional retirement age. Key reasons for continuing to work include a focus or passion for their discipline; ongoing research, publications, and projects; guiding a group of students through to the completion of their academic degree or to preserve a department the employee fears will be eliminated.

One underutilized benefit that is available to eligible academic employees is the ability to access retirement plans funds from their employer’s retirement plan while working. This article looks at the options available and how to determine eligibility for accessing them and what should to consider prior to accessing these funds.

Should I take money out of my retirement plan before I stop working?

Typical financial advice states that it is financially unwise to take withdrawals from retirement plans during the working years because retirement accounts serve to provide income in retirement not to supplement current spending needs. Can there be exceptions to this rule of thumb?

Long-time employees of academia often accumulate sizable retirement accounts due to the generous contribution levels in their retirement plans. For example, the largest 20 institutions of higher education in Massachusetts have employer contribution rates ranging from 7% to 15% usually dependent on a graduated schedule as employees age.  Once you add an employee match of another 3-5%, you now have 10-20% of annual pay going towards retirement.

If an employee plans to continue working well beyond full retirement age, it is imperative to consider financial goals and strategies to uncover opportunities or address issues.  

Consider three factors when accessing in-service withdrawals from employer retirement plans

With any financial strategy there will be trade-offs to evaluate especially tax consequences, but here are three scenarios to think about that may apply in your situation.  

  1. Addressing other financial goals prior to retirement – Financial assets only have value if they are used purposefully to meet one’s personal goals. At their core, retirement accounts were created to provide income in retirement but financial goals are not that simple. For example, you may have a desire to assist with a child or grandchild’s student loan debt or a first-time home purchase but you don’t have available funds outside of your retirement plan.

If your income needs will be met despite an early withdrawal should you consider tapping your retirement account to meet your goals?  What if you have high interest debt or want to buy a second home to use in retirement? If you have multiple financial goals you intend to address in retirement, it makes sense to coordinate the implementation and timetable for all your corresponding goals. It may be wiser to address some goals prior to retirement if the tax consequences do not offset any of the benefits.  

  1. More control on advice, oversight, investments, and taxation – This strategy may involve a tax-free transfer to another retirement account that is not administered by your employer. Do-it-yourself investors or those with financial advisers may want control of the assets by themselves or by their chosen advisors as opposed to staying under the rules of their employer’s retirement plan.  
  1. Building up investment assets outside of tax-deferred retirement accounts – Retirement plan participants whose assets are all or mostly pre-tax will potentially have a large, tax bill when they begin taking money out of their retirement plans. For employees who may have most or all their savings in retirement plans, they may want to consider withdrawals to increase their non-tax-deferred savings. This can help serve to purposefully build up reserves for unplanned financial needs such as health care or family circumstances which are often more expensive than expected.

How to determine whether you are eligible for in-service withdrawals  

Retirement plans offered by institutions are established within the parameters of the Employment Retirement Income Security Act or ERISA. Institutions must follow certain rules but have flexibility in what is offered to their employees. Institutions have the option to offer in-service withdrawals and how and when those options may be accessed.

To determine whether you have access to funds while working, use this checklist to address any issues:

  1. What in-service withdrawal options does your employer offer? There is no requirement for employers to offer in-service withdrawals even for hardship distributions. For institutions that do offer in-service withdrawals it is often based on age on age or work-status. 
  1. Which of my retirement assets are eligible? Once you establish whether a retirement plan offers the in-service feature, next you want to see whether you have eligible funds for this option. The plan will define what assets are available and when. For example, the Emerson College Tax Deferred Annuity Plan allows for categories such as rollovers and after-tax contributions to be withdrawn at any time but restricts access to withdraw mandatory and voluntary contributions until age 59 1/2. Boston University allows for in-service withdrawals including employer contributions at age 65 regardless of work status.  
  1. Are there any restrictions based on the investment company? Even if your employer offers access to retirement funds prior to retirement there may be other factors to address with your investment company. Common examples will be an investment that has limited liquidity, which is common with fixed annuity investments, or there may be withdrawal fees or penalties. The availability of loans, may only be offered from some or one of the investment companies in the retirement plan.

Specific in-service withdrawal options from retirement plans  

Accessing funds from a retirement plan come in three forms: borrowing, transferring, or withdrawing from the investment account. Each withdrawal option has unique differences from the other options. Once you determine the availability and need, you can look at which option(s) suit your planning needs.

  1. Borrowing from the retirement plan: For employees who are near or beyond traditional retirement age, having the ability to take a tax-free loan can be a good stop-gap approach to fund other goals. Loans are limited by the IRS to $50,000 per person but there are other factors to address to determine the availability of this planning strategy.  

First, check with human resources to confirm that loans are a provision of your retirement plan. Second, determine whether your assets meet the plan requirements. It is quite common in academia that loans will only be available for assets related to your voluntary contributions.  

For example, if your employer requires you to put in 5% to receive a 10% employer match you may not have the ability to take a loan on your 5% contributions because those are matched contributions. The loan might only be available for personal contributions above 5%.  

  1. In-Service (employees still working) transfers and withdrawals: Employee often work past traditional “normal retirement age” for the reasons we described above. One benefit that is often available within higher education retirement plans is taking what is known as an in-service withdrawal. In-service withdrawals are defined as withdrawals made while employees are still working.  

There are three examples that are common:  

Age 59 ½ - At the same time a 10% penalty disappears from retirement withdrawals, many institutions allow for access to funds for those who are working and have reached age 59 1/2 . Often, this provision is available for voluntary contributions only but each institution will dictate what they allow.  

Age 65 – Upon reaching a specific age such as age 65, triggers some plan to allow in-service withdrawals. An age 65 in-service withdrawal often allows for any asset to be transferred or withdrawn. This feature is available with no restriction form the employer but there may be restrictions or charges from the investment company.  

Required minimum distribution (age 72) – For employees who continue to work, they are not required to take distributions from their current employer’s retirement plan however, there may be a provision that allows the employee to take the withdrawal amount. Employers utilize this option when they want to put a cap on withdrawals but still allow some access.

  1. Phased Retirement Plans: Due to the longer and later working years for the reasons mentioned above, there may be a phased retirement plan often aimed at tenured faculty. An example of this approach might be working half-time for a couple of years prior to going into full retirement. Often, full benefits (but pro-rated retirement contributions) will be provided but with reduced income. Normally, all retirement assets will be available to supplement regular income. For planning purposes, withdrawals should be considered even when none are needed because there may be tax benefits to address.


Using retirement assets for financial needs during the work years normally should be avoided except when there is a dire need. However, as one nears retirement especially in the academic world, planning strategies should include looking at how best to utilize retirement assets especially for employees who plan to work late in their 60’s and 70’s. There may be untapped value to meet financial goals sooner than retirement.