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If you’ve ever changed jobs, chances are you’ve considered rolling over your old 401(k) to an individual retirement account. But can you roll over your 401(k) even if you haven’t changed jobs? The answer lies in what’s known as an in-service rollover. However, before proceeding with one, you may want to speak with a financial advisor about how to best save for retirement.
What Is an In-Service 401(k) Rollover?
An in-service rollover is the transfer of eligible assets from your current employer’s 401(k) plan to an IRA. While 401(k) rollovers are typically completed when you leave a job, an in-service rollover enables you to move eligible money out of your current 401(k) and into an IRA without a job change. Those seeking more investment choices or lower fees may explore this rollover option.
Who Is Eligible for an In-Service 401(k) Rollover?
It all depends on your plan. Not all 401(k) plans permit in-service distributions, and for those that do, their rules and conditions may vary. One plan may limit in-service rollovers to certain employees, such as those who have reached age 59½, depending on the source of the funds and the plan’s terms.
Plan providers might also have special requirements for in-service rollover eligibility. Eligibility may depend on the type of contributions involved, how long amounts have been held in the plan and other plan-specific distribution rules.
Regardless of your circumstances, you’ll first want to review your 401(k) summary plan document and then contact your plan administrator to find out if you are eligible and what conditions apply.
Reasons to Use an In-Service 401(k) Rollover
The benefits of an in-service rollover are the same as a conventional 401(k)-to-IRA rollover. Moving money out of your 401(k) and into an IRA gives you more control and flexibility with your investments. While 401(k) plans typically offer a limited set of investments, IRAs afford investors virtually limitless options for buying mutual funds, exchange-traded funds (ETFs), individual stocks and bonds, real estate investment trusts and other securities. Your IRA may also have lower fees than your 401(k).
Drawbacks of an In-Service 401(k) Rollover
The drawbacks of an in-service rollover mirror that of a regular rollover. IRAs generally enjoy fewer legal protections than 401(k) plans, and the owner of an IRA cannot borrow money from the account, unlike a 401(k).
The rules for taking distributions without the 10% additional tax can also differ between an IRA and a 401(k). IRA owners can take distributions at any age, but taxable withdrawals before age 59 ½ generally face a 10% additional tax unless an exception applies.
A separate exception may allow penalty-free distributions from a 401(k) if you separate from service during or after the calendar year in which you turn 55. This exception does not apply to IRAs. Rolling 401(k) assets into an IRA could therefore affect access to this exception if you later leave the employer before age 59 ½.
Lastly, an in-service rollover does not automatically prevent you from continuing to contribute to your company’s 401(k). Contribution eligibility depends on the terms of the plan, so you should confirm the rules with the plan administrator.
Tax Implications of an In-Service 401(k) Rollover
Moving money from your current 401(k) plan into an IRA while you are still employed can affect your taxes, depending on how the transfer is handled and which accounts are involved. A direct rollover of pre-tax 401(k) funds to a traditional IRA generally does not create current taxable income, while other transfers, such as moving pre-tax assets to a Roth IRA, can have tax consequences.
A direct rollover sends your 401(k) funds straight to an IRA. When eligible pre-tax 401(k) assets are rolled directly into a traditional IRA, the amount generally remains tax-deferred and is not subject to the mandatory 20% withholding that applies when certain eligible rollover distributions are paid directly to you.
An indirect rollover, however, occurs when the plan sends the money to you. In that case, the plan administrator generally must withhold 20% of the taxable portion of an eligible rollover distribution for federal taxes. You then have 60 days to deposit the full amount, including the withheld portion, into an IRA. If you do not roll over the full eligible amount within that period, the taxable portion that is not rolled over is generally included in your income for the year. If you are under age 59½, an additional 10% early withdrawal tax may also apply unless an exception applies.
Use our calculator to see how increasing your taxable income through an IRA conversion may impact what you owe.
Meanwhile, if you move money from a traditional 401(k) into a Roth IRA, the transfer is considered a Roth conversion. The pre-tax amount converted generally becomes taxable in the year it is rolled over. After-tax amounts, if any, may receive different tax treatment. Paying the taxes with outside funds rather than using the rollover money typically helps preserve your retirement balance, but this depends on your personal financial situation.
Before completing any in-service rollover, review the rules for your specific plan and confirm how the transfer will be reported to the IRS. Each provider may have different procedures for withholding and documentation. Since tax treatment can vary based on your income level, state of residence and type of account, consider reviewing the details with a qualified financial advisor or tax professional before finalizing your decision.
Steps to Complete an In-Service 401(k) Rollover
First, check your 401(k) plan rules to make sure you can move money while you are still employed. Eligibility may depend on your age, how long you have participated in the plan and whether employer contributions are fully vested. Your plan administrator can confirm which portion of your balance is available for an in-service rollover.
Next, open the account that will receive the money. A traditional IRA may allow pre-tax retirement savings to retain their tax-deferred status. Sending pre-tax assets to a Roth IRA generally means paying income tax on the converted amount for that year.
Then, ask your employer or plan administrator for the paperwork needed to transfer the funds. You will typically need to provide information about the IRA and indicate how you want the money delivered. Check the account number, financial institution and other transfer details carefully before submitting the request.
A direct rollover is generally the simpler option because the retirement funds are transferred to the receiving account rather than given to you. When a taxable portion of an eligible rollover distribution is paid to you instead, the plan generally must withhold 20% for federal income taxes. You normally have 60 days to complete the rollover, and replacing the withheld amount may be necessary if you want the entire eligible distribution deposited into the new account.
Once the transfer is underway, check both accounts to make sure the correct amount arrives. Processing times vary by provider, so keep the confirmation documents until the transaction is complete.
You should also keep the tax forms associated with the rollover. Your 401(k) plan will generally send Form 1099-R showing the distribution, and the IRA provider reports the rollover contribution on Form 5498. These records can be used when reporting the transaction on your federal tax return.
Bottom Line
An in-service rollover may be a good financial decision for an employee seeking more investment options than what their 401(k) offers. However, not all 401(k) plan providers offer them, and those that do could have specific requirements for qualifying. You’ll need to contact your plan administrator to determine if an in-service rollover is an option for you. Keep in mind, too, that while federal law provides significant protections for many employer-sponsored retirement plan assets, IRA creditor protections can differ depending on bankruptcy law, state law and the circumstances involved. You’ll want to find out whether IRA assets are shielded from creditors and lawsuits in your state.
“In my opinion, there are two very important things to remember when completing an in-service 401(k) rollover. The first is that you should almost always ensure that you are completing a direct rollover. Second, 401(k) plans have lower age restrictions for penalty-free withdrawals, so consider when you might want to dip into the account before transferring funds to an IRA,” said Matthew Hofacre, MSPFP, CFP®, EA.
Matthew Hofacre, MSPFP, CFP®, EA provided the quote used in this article. Please note that Matthew is not a participant in SmartAsset AMP, is not an employee of SmartAsset and has been compensated. The opinion voiced in the quote is for general information only and is not intended to provide specific advice or recommendations.
Tips on Rolling Over Your 401(k)
- Work with a financial advisor to optimize your retirement planning. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Whether you’re contemplating a conventional rollover or an in-service transfer, understanding how much you’re paying in fees and other charges is an important part of the process. Review your current plan’s fee disclosure and research the fees associated with funds you’re interested in for your IRA.
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