Can I Move My 401k to Another Company While Still Employed?

It is possible to move your 401(k) to another company even while still employed, a process often referred to as an “in-service rollover.” However, whether you can perform such a rollover depends entirely on the specific rules of your employer’s 401(k) plan.

Eligibility and Conditions for In-Service Rollovers

Your ability to move 401(k) funds while still employed depends on your employer’s plan document, which dictates whether “in-service” distributions are allowed. Not all 401(k) plans permit these distributions, as they are not universally mandated by retirement regulations. Your plan’s Summary Plan Description (SPD) is the primary document detailing these specific rules and should be reviewed carefully.

Common conditions for an in-service rollover include reaching age 59½. At this age, many plans permit participants to withdraw or roll over funds without the usual 10% early withdrawal penalty, though income taxes still apply to pre-tax amounts. Another condition relates to the vesting of your funds. Only vested funds, meaning contributions you have full ownership of, are eligible for distribution or rollover.

Some plans allow in-service rollovers of specific contributions, such as after-tax contributions or funds previously rolled into the plan from another retirement account. These funds can be accessed even before age 59½ without triggering early withdrawal penalties. Pre-tax employee deferrals and employer matching contributions are more restricted and cannot be rolled over in-service until specific age or termination conditions are met.

Outstanding 401(k) loans can complicate an in-service rollover. If you have an active loan, the plan requires it to be paid off before the remaining balance can be rolled over. Failure to repay a loan, especially upon leaving employment, can result in the unpaid balance being treated as a taxable distribution, potentially subject to income tax and early withdrawal penalties. Contact your plan administrator or consult the Summary Plan Description, which is legally required to be provided to you, to determine your plan’s specific provisions.

Rollover Options and Destinations

Once your 401(k) plan allows for an in-service rollover, you have several options for where your funds can be moved. The destination account impacts investment flexibility, fees, and future tax treatment. Each common destination serves a different purpose for your retirement savings.

One option is to roll over your funds into a new employer’s 401(k) plan, assuming your new plan accepts rollovers from external accounts. This approach allows you to keep your retirement savings consolidated within an employer-sponsored plan, which may offer certain protections or unique investment options. However, the investment choices and fee structures of a new 401(k) might be limited compared to other options.

Alternatively, you can roll over your 401(k) funds into an Individual Retirement Account (IRA), specifically a Traditional IRA or a Roth IRA. A Traditional IRA offers tax-deferred growth, meaning your investments grow without immediate taxation, and you pay taxes only upon withdrawal in retirement. A Roth IRA, on the other hand, is funded with after-tax dollars, and qualified withdrawals in retirement are tax-free, including any investment earnings. Rolling pre-tax 401(k) funds into a Roth IRA is known as a Roth conversion, which is a taxable event in the year of conversion.

When choosing a destination, distinguish between a “direct rollover” and an “indirect rollover.” A direct rollover, also known as a trustee-to-trustee transfer, involves your current 401(k) administrator sending the funds directly to the new retirement account. This method avoids mandatory tax withholding and the risk of missing a deadline. An indirect rollover means you receive a check for your funds, and you are then responsible for depositing it into the new account within a specified timeframe.

The Rollover Process

Executing a 401(k) rollover involves specific steps to ensure funds are transferred correctly and without unnecessary tax implications. The process begins by contacting your current 401(k) plan administrator.

Inform them of your intention to perform an in-service rollover and request the necessary forms and instructions. This involves completing a distribution request form provided by your current plan. You will also need to provide accurate information for the receiving account, such as the account number and the name and address of the new financial institution or custodian. For a direct rollover, the check will be made payable to the new institution “for your benefit,” or the funds may be transferred electronically.

If an indirect rollover is chosen, your current plan will issue a check directly to you. You have a strict 60-day window from the date you receive the funds to deposit the entire amount into the new retirement account. Failing to meet this deadline can result in the distribution being treated as a taxable withdrawal, subject to income tax and penalties.

After submitting all required documentation, allow time for your current 401(k) administrator to process the request, which can take a few days to several weeks. Maintain clear communication with both your current plan administrator and the receiving institution throughout this period. Keep thorough records of all correspondence, forms submitted, and confirmation of transfer to ensure a smooth and successful rollover.

Tax Implications of Rollovers

Understanding the tax consequences of any 401(k) rollover is important, as different methods lead to varying tax treatments. A direct rollover, where funds are transferred directly from one qualified retirement account to another, is a non-taxable event. There is no tax withholding, and the tax-deferred status of the funds is maintained.

The tax implications change with an indirect rollover. If you choose this method, your current 401(k) plan administrator is required to withhold 20% of the distribution for federal income tax purposes. This withholding occurs because the funds are paid directly to you, even if you intend to roll over the entire amount.

To avoid the distribution being fully taxed and penalized, you must deposit the full gross amount, including the 20% that was withheld, into a new qualified retirement account within the 60-day deadline. If you successfully roll over the full amount, the 20% withheld can be recovered as a tax credit when you file your income tax return for that year. Failure to complete the indirect rollover within the 60-day period means the entire distribution becomes taxable income, and if you are under age 59½, it may also be subject to an additional 10% early withdrawal penalty.

A Roth conversion, which involves rolling pre-tax 401(k) funds into a Roth IRA, has immediate tax consequences. The pre-tax amount converted is added to your gross income for the year of conversion and taxed at your ordinary income tax rates. This can push you into a higher tax bracket for that year, so careful planning is advised. If you are rolling over after-tax contributions from your 401(k) to a Roth IRA, the principal amount is tax-free, but any earnings on those after-tax contributions would be taxable upon conversion. Regardless of the rollover type, you will receive Form 1099-R from your old plan administrator, reporting the distribution. The new account provider will then issue Form 5498, which reports the contributions and rollovers made to the IRA. These forms are necessary for accurately reporting the transaction on your tax return.