Can You Move Your 401k to an IRA While Still Employed?

A 401(k) plan is a tax-advantaged retirement savings vehicle offered by employers. An Individual Retirement Arrangement (IRA) provides another avenue for retirement savings, often with broader investment options. While many assume 401(k) funds can only move to an IRA after leaving employment, certain provisions allow transfers while still employed. This article clarifies the conditions and processes for an in-service 401(k) to IRA rollover.

Determining Your Eligibility

Moving funds from a 401(k) to an IRA while still working, known as an in-service rollover, is not universally permitted. It depends on your employer’s 401(k) plan rules. To determine eligibility, consult your plan’s Summary Plan Description (SPD) or contact the plan administrator directly.

Many 401(k) plans permit in-service distributions once a participant reaches age 59½. This allows individuals to move funds to an IRA, often for broader investment choices or account consolidation. Funds distributed under this rule are generally eligible for rollover to either a traditional or Roth IRA, depending on the tax treatment of the original contributions.

Another scenario for in-service rollovers involves after-tax contributions to a 401(k) plan. These contributions have already been taxed, distinct from pre-tax or Roth contributions. Many plans permit these after-tax contributions, along with any earnings, to be distributed while still employed. The principal portion can typically be rolled over to a Roth IRA tax-free, while any earnings would be taxable if rolled into a Roth IRA.

Some employer plans may also offer in-service distribution options under less common circumstances, such as plan termination events or certain governmental or church plans. It is important to differentiate between voluntary in-service distributions and mandatory distributions, such as required minimum distributions (RMDs), which have different rules and purposes. Understanding your specific plan’s rules is the first step in determining if an in-service rollover is an option for your situation.

The Rollover Process

Once eligibility for an in-service rollover is confirmed, initiate the transfer process by contacting your 401(k) plan administrator or recordkeeper. They will provide the necessary forms and instructions specific to your plan.

Gather specific information about your IRA to complete the rollover forms. This typically includes your IRA account number, the routing number of your IRA custodian, and the full name and address of the IRA custodian. Your IRA custodian can readily provide these details.

The 401(k) distribution forms will require you to specify the type of distribution and the destination of the funds. You must clearly indicate that the distribution is intended as a direct rollover to an IRA. If your plan allows for the rollover of both pre-tax and after-tax funds, the forms will often have distinct sections to designate how each type of contribution should be handled, such as rolling pre-tax amounts to a traditional IRA and after-tax amounts to a Roth IRA.

Opt for a direct rollover, where funds transfer electronically or via check directly from your 401(k) plan administrator to your IRA custodian. This method avoids complications and tax implications associated with indirect rollovers. In an indirect rollover, funds are sent to you directly, and you have 60 days from receipt to deposit them into an eligible IRA.

After completing and signing the forms, submit them to your 401(k) plan administrator via mail, fax, or an online portal. Track the transfer’s progress and confirm with your IRA custodian that the funds have been received and correctly allocated to your account. This verification helps ensure a smooth and successful rollover.

Understanding Tax Treatment

A direct rollover from a pre-tax 401(k) account to a traditional IRA is generally a tax-free transaction. You do not owe income tax on the amount rolled over at the time of the transfer, as the funds retain their tax-deferred status. The transfer simply moves the retirement savings from one qualified account to another without triggering a taxable event.

Indirect rollovers carry different tax implications, primarily concerning mandatory withholding. If you receive a distribution check from your 401(k) plan for an indirect rollover, federal law mandates a 20% withholding for federal income tax. To roll over the full original distribution amount within the 60-day period, you must contribute the 20% withheld from other funds, or that 20% will be considered a taxable distribution subject to ordinary income tax and potentially an early withdrawal penalty if you are under age 59½.

When rolling over after-tax contributions from a 401(k) to a Roth IRA, tax treatment is specific to the distribution’s components. The principal amount of your after-tax contributions, already taxed, can be rolled into a Roth IRA tax-free. However, any earnings accrued on those after-tax contributions within the 401(k) plan will be considered taxable income in the year of the rollover if moved into a Roth IRA.

A failed rollover, such as missing the 60-day deadline for an indirect rollover or making an ineligible transfer, can lead to significant tax consequences. The entire distribution may then be treated as taxable income in the year received. If you are under age 59½, the distribution could also be subject to a 10% early withdrawal penalty, in addition to the regular income tax.

For tax reporting purposes, your 401(k) plan administrator will typically issue Form 1099-R, which reports the distribution amount and indicates that it was a direct or indirect rollover. Subsequently, your IRA custodian will issue Form 5498, confirming the receipt of the rollover funds into your IRA. These forms are crucial for accurately reporting the transaction on your annual income tax return.