Can I Rollover My 401k While Still Employed?

An in-service rollover involves moving funds from your current employer’s 401(k) plan to another retirement account while you are still employed by that company. It is possible to roll over a 401(k) while still employed, but only under specific circumstances determined by both Internal Revenue Service (IRS) regulations and the provisions of your employer’s particular 401(k) plan. This process allows individuals to gain more control over their retirement savings or consolidate accounts without needing to separate from service. Understanding the conditions and procedures is essential.

When In-Service Rollovers are Permitted

In-service rollovers depend on your 401(k) plan document and IRS guidelines. The primary condition often allowing these rollovers is reaching age 59½. At this age, participants can take distributions from their 401(k) without incurring the 10% early withdrawal penalty, even if they remain employed.

Beyond the age 59½ rule, some 401(k) plans may permit in-service distributions under other specific conditions. For example, a plan might allow the distribution of certain vested employer contributions or employee after-tax contributions after a set number of years of participation or service, regardless of age. These provisions are entirely at the discretion of the plan sponsor and are not mandated by federal law.

Many plans allow for the in-service distribution of after-tax contributions. These funds, along with any earnings, can often be rolled over into a Roth IRA, allowing for tax-free growth and distributions in retirement. Alternatively, they might be rolled into a traditional IRA, maintaining their tax-deferred status. To confirm eligibility, consult your employer’s Summary Plan Description (SPD) or contact the plan administrator.

Choosing a Rollover Destination

Once eligibility for an in-service rollover is confirmed, selecting the appropriate destination for your funds is a next step. The two primary options for rolling over 401(k) assets are an Individual Retirement Account (IRA) or, in some specific cases, another employer’s 401(k) plan. Each option presents distinct characteristics regarding investment flexibility, fee structures, and distribution rules.

Rolling funds into an IRA, either a Traditional IRA or a Roth IRA, is a common choice offering broader investment options than many employer-sponsored plans. A Traditional IRA rollover maintains the tax-deferred status of pre-tax 401(k) contributions and earnings, with taxes paid only upon withdrawal in retirement. Converting these funds to a Roth IRA, however, requires paying income taxes on the pre-tax amounts at the time of the rollover, but subsequent qualified withdrawals in retirement are entirely tax-free.

When considering a rollover to an IRA, factors such as potential investment management fees, administrative costs, and creditor protection should be evaluated. While 401(k)s generally offer strong creditor protection under the Employee Retirement Income Security Act (ERISA), IRA protection can vary based on state laws. Another consideration is the impact on future Required Minimum Distributions (RMDs), which generally begin at age 73 for both account types, though Roth IRAs do not have RMDs for the original owner.

The Rollover Process

Initiating an in-service 401(k) rollover begins by contacting your current 401(k) plan administrator or recordkeeper. You will need to request the necessary forms for an in-service distribution and rollover. These forms typically ask for personal identification details, current 401(k) account information, and destination account specifics, including the account number and receiving custodian’s details.

The transfer of funds can occur through one of two methods: a direct rollover or an indirect rollover. A direct rollover is generally preferred, as it involves the plan administrator transferring funds directly to the new IRA or 401(k) custodian. This method ensures funds never pass through your hands, thus avoiding potential tax complications and mandatory withholding.

An indirect rollover involves the plan distributing funds directly to you, usually via a check made payable to you. If you choose this method, you are responsible for depositing the full amount into a new qualified retirement account within 60 days of receiving the distribution. Failure to complete the deposit within this 60-day window can result in the entire distribution being considered a taxable withdrawal, potentially subject to income taxes and an early withdrawal penalty if you are under age 59½. After completing the forms and selecting your rollover method, submit the paperwork according to the plan administrator’s instructions, which may involve mailing documents or using an online portal. Following up periodically to confirm the transfer’s completion is advisable, as processing times can range from several days to a few weeks.

Navigating Tax Implications

Understanding the tax implications is important for any 401(k) in-service rollover to ensure it remains a tax-free event. When executed correctly as a qualified rollover, the transfer of funds from your 401(k) to an IRA or another 401(k) is generally not a taxable distribution. This means no immediate income tax is due on the transferred amount.

However, if you opt for an indirect rollover, the 401(k) plan administrator is required to withhold 20% of the distributed amount for federal income taxes. For example, if you roll over $50,000, you would receive a check for $40,000, with $10,000 withheld. To avoid the distribution being treated as a taxable withdrawal, you must deposit the entire original distribution amount, including the 20% withheld, into the new retirement account within the 60-day timeframe. You recover the withheld 20% when you file your income tax return.

Failing to complete an indirect rollover within the 60-day period, or depositing less than the full amount, results in the untransferred portion being treated as a taxable distribution. If you are under age 59½ at the time of distribution, this taxable amount may also be subject to an additional 10% early withdrawal penalty, on top of your regular income tax rate. The 401(k) plan will report the distribution on Form 1099-R, which you use to correctly report the rollover on your annual tax return. Consulting a qualified tax professional is recommended to navigate these rules and ensure compliance.