How an In-Service 401(k) Rollover Works

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 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 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 plan providers offer in-service distributions, and for those that do, their rules and conditions may vary. One plan may limit in-service rollovers only to employees who are 59½.

Plan providers might also have special requirements for in-service rollover eligibility. You may only be eligible if only you have contributed to the plan for a minimum of five years. Meanwhile, some plans might only permit assets to be rolled over if they have been in the account for two years.

Regardless of your circumstances, you’ll first want to review your 401(k) summary plan document and then contact your plan provider 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 age at which an IRA owner can take distributions is also higher than someone with a 401(k), who may become eligible for penalty-free withdrawals at age 55. Once your money is rolled over into an IRA, you’ll have to wait until you turn 59½ to access the money without triggering the 10% IRS penalty.

Lastly, an in-service rollover may affect your ability to contribute to your company’s 401(k) plan. Some providers may preclude you from making tax-deferred contributions to your 401(k) for a period of time following an in-service rollover.

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 transfer of funds between accounts usually has no tax consequences, while taking possession of the funds yourself can trigger taxes or penalties.

A direct rollover sends your 401(k) funds straight to an IRA. Because the money remains in a tax-advantaged account, this type of transfer is not taxable. No income tax or early withdrawal penalty applies since the funds never pass through your hands.

An indirect rollover, however, occurs when the plan sends the money to you. In that case, the plan administrator must withhold 20% of the 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 redeposit the entire sum within that period, the IRS will treat the transaction as a withdrawal, and the amount becomes taxable income for the year. If you are under age 59½, an additional 10% early withdrawal penalty may also apply.

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 amount converted becomes taxable in the year it is rolled over. 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.

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 blanket protection for 401(k) assets, the legal protections for IRAs can vary from state to state. You’ll want to find out whether IRA assets are shielded from creditors and lawsuits in your state.

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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