Can You Do a Partial 401k Rollover Into Another Retirement Account?

Moving funds from a 401(k) to another retirement account can provide better investment choices, lower fees, or more flexibility. A partial rollover allows you to transfer a portion of your balance while keeping the rest in your current plan. This can be useful if you want to retain some benefits of your employer-sponsored plan while accessing other retirement savings options.

Understanding partial rollovers is essential before making a decision. Specific rules, tax implications, and potential penalties could impact your finances.

Requirements

A partial 401(k) rollover must comply with IRS regulations and your employer’s plan terms. Some plans require full distributions when rolling funds into another account, so reviewing your plan’s summary description or speaking with the plan administrator is crucial to determine eligibility.

The type of 401(k) you have affects your options. Traditional 401(k) funds can be rolled into another traditional account, such as an IRA or another employer’s 401(k), without triggering immediate taxes. Roth 401(k) contributions must be transferred into a Roth IRA or another Roth-designated account to maintain their tax-free withdrawal benefits. Mixing pre-tax and after-tax funds in a rollover can create complications, so the receiving account must be able to handle both types properly.

Some plans only permit rollovers after a triggering event, such as leaving the employer, reaching age 59½, or experiencing a hardship withdrawal. If you are still employed, your plan may allow in-service rollovers, but these are less common and often come with additional conditions.

Tax Implications

Tax consequences depend on the type of funds involved and how the transfer is executed. A direct rollover, where funds move between accounts without being sent to you first, avoids immediate taxation. If a distribution is made payable to you instead, the IRS mandates a 20% withholding on the taxable portion, even if you plan to redeposit the funds within 60 days. If the full amount, including the withheld portion, is not redeposited, the shortfall is treated as a taxable distribution.

A partial rollover from a traditional 401(k) to a Roth IRA, known as a Roth conversion, requires paying income tax on the converted amount. This can push you into a higher tax bracket, increasing your overall tax burden. If the rollover moves from a traditional 401(k) to a traditional IRA or another employer’s 401(k), taxes are deferred until withdrawals begin in retirement. Roth 401(k) funds, when rolled into a Roth IRA, maintain their tax-free withdrawal status, provided the five-year rule is met.

Employer contributions and earnings may complicate tax treatment. If your 401(k) includes after-tax contributions, only earnings on those funds are taxable upon withdrawal. Rolling after-tax contributions into a Roth IRA allows for tax-free growth, while moving them to a traditional IRA defers taxes on future earnings. Some plans allow direct rollovers of after-tax contributions into a Roth IRA while transferring pre-tax funds separately, helping to manage tax exposure.

Partial Rollover Process

Executing a partial rollover starts with determining the exact amount to transfer and ensuring the receiving account can accept the funds. Most financial institutions have specific procedures requiring paperwork or digital authorization. Choosing between a direct and indirect rollover is important, as the method affects tax treatment and potential penalties. A direct rollover, where funds are sent directly between accounts, eliminates the risk of early withdrawal penalties or tax withholding issues.

Coordinating with both your current plan administrator and the receiving institution helps prevent processing delays. Some 401(k) providers impose internal processing times, meaning transfers can take days or weeks. Ensuring all required forms are correctly completed and confirming any restrictions on distribution timing can help avoid unnecessary delays. Some financial institutions may also require a minimum deposit for the receiving account, which should be verified beforehand.

Tracking the movement of funds is essential, especially with an indirect rollover subject to the 60-day deposit rule. Keeping records of all transactions, including confirmation statements and correspondence with financial institutions, ensures proper documentation in case of an IRS audit. If errors occur, such as a misdirected deposit or incorrect tax withholding, addressing them immediately can help prevent financial complications.

Employer Plan Rules

Workplace retirement plans have specific policies regarding partial rollovers, outlined in the plan document. Some plans limit how often employees can transfer funds to outside accounts within a given period.

Employer matching contributions, profit-sharing deposits, and safe harbor contributions may be subject to vesting schedules, meaning an employee might not have full ownership of these funds until meeting tenure requirements. If a partial rollover is initiated before full vesting, only the vested portion can be transferred, with the remaining balance staying in the plan.

Age-Based Penalties

The age at which you initiate a partial 401(k) rollover determines whether penalties apply.

For individuals under 59½, a properly executed partial rollover avoids early withdrawal penalties. However, if funds are distributed directly to the account holder and not rolled over within 60 days, the IRS treats the amount as an early withdrawal, subjecting it to a 10% penalty in addition to ordinary income tax. Certain exceptions exist, such as rollovers due to disability or qualified reservist distributions, but these require specific conditions. Some plans may also restrict in-service rollovers before this age.

Once you reach 73, required minimum distributions (RMDs) apply to traditional 401(k) accounts. RMDs cannot be rolled over and must be withdrawn annually based on IRS life expectancy tables. Attempting to roll over an RMD is considered an excess contribution and may be penalized. Roth 401(k) accounts previously had RMD requirements, but as of 2024, these have been eliminated, allowing funds to remain indefinitely without mandatory withdrawals.

Coordination with Multiple Retirement Accounts

Managing multiple retirement accounts while executing a partial 401(k) rollover requires careful planning to optimize tax benefits and investment strategies. The decision to roll funds into an IRA, another 401(k), or both depends on employer plan benefits, fee structures, and investment options. Consolidating accounts can simplify portfolio management, but maintaining multiple accounts may provide diversification and access to unique investments.

If rolling funds into an IRA, consider whether a traditional or Roth IRA aligns with your long-term tax strategy. Traditional IRAs maintain tax deferral, while Roth IRAs require taxes upfront but allow tax-free withdrawals in retirement. If you have multiple 401(k) accounts from previous employers, consolidating them into a single IRA can streamline tracking and reduce fees. However, if your current employer’s 401(k) offers strong investment options and low fees, keeping funds there may be beneficial.

If you have multiple active 401(k) accounts, coordinating rollovers requires ensuring each plan’s rules align with your goals. Some employers allow incoming rollovers from previous 401(k)s, while others do not. If you plan a rollover while still employed, reviewing whether your current plan permits in-service rollovers is necessary. Additionally, if you are subject to RMDs, keeping funds in an employer-sponsored plan may delay required withdrawals if you are still working. Evaluating the benefits and restrictions of each account ensures a rollover strategy that maximizes flexibility and tax efficiency.