Can You Roll a 401k Into an IRA While Still Employed?

It is possible to roll over funds from a 401(k) plan into an Individual Retirement Account (IRA) while still employed. This process, often called an “in-service rollover” or “in-service distribution,” allows individuals to move a portion of their retirement savings from an employer-sponsored plan to an IRA.

Eligibility and Conditions for In-Service Rollovers

An in-service rollover depends on the specific provisions of an employer’s 401(k) plan, as not all plans permit such distributions while an employee is still actively working. Plans are not obligated to offer in-service withdrawals, but many do under certain circumstances.

A common eligibility requirement for in-service distributions is reaching age 59½. At this age, many plans allow participants to withdraw or roll over elective deferrals, including Roth contributions and safe harbor contributions, without penalty. Some funds within a 401(k) may be eligible for in-service distributions even before age 59½. These include after-tax contributions and funds rolled over from previous employer plans into the current 401(k). Employer matching contributions, once vested, can also be eligible for in-service distributions, though pre-tax employee contributions are generally not accessible until separation from service or reaching the plan’s specified age.

To determine if an in-service rollover is an option, consult the employer’s 401(k) plan administrator or review the Summary Plan Description (SPD). This document outlines the specific rules governing distributions, including age requirements and the types of contributions eligible for an in-service withdrawal.

Initiating an In-Service Rollover

Once eligibility is confirmed, initiating an in-service rollover involves several procedural steps. There are two primary methods for moving funds: a direct rollover or an indirect rollover. A direct rollover, where funds are transferred directly from the 401(k) plan administrator to the IRA custodian, is the recommended approach due to its tax implications.

To begin, individuals typically contact both their 401(k) plan administrator and their chosen IRA custodian. The 401(k) plan administrator will provide the necessary distribution request forms, which often require details such as the amount to be rolled over and the receiving IRA account information. The IRA custodian will provide account application forms if a new IRA is being established, along with instructions for receiving a direct rollover.

After completing the required forms, they are submitted to the 401(k) plan administrator. The administrator then processes the request, often issuing a check payable directly to the IRA custodian or initiating an electronic transfer of funds. Processing timelines can vary, ranging from a few days to several weeks. Following the transfer, the IRA custodian will confirm receipt of the funds, and the individual should receive statements reflecting the updated account balance.

Tax Implications of an In-Service Rollover

Understanding the tax implications is important for performing an in-service rollover. A direct rollover, where funds move directly from the 401(k) plan to the IRA, is considered a non-taxable event. This means no income tax is immediately due on the transferred amount, and no tax withholding is required.

In contrast, an indirect rollover involves the funds being distributed directly to the individual, who then has 60 days to deposit them into an IRA. For indirect rollovers, federal law mandates a 20% federal income tax withholding from the distributed amount. If the entire amount, including the withheld portion, is not rolled over into an IRA within the 60-day window, the unrolled portion becomes a taxable distribution and may also be subject to an additional 10% early withdrawal penalty if the individual is under age 59½.

For rollovers from a Roth 401(k) to a Roth IRA, the transfer is non-taxable, provided the Roth 401(k) distribution meets the requirements for a qualified distribution. Tax reporting for rollovers involves specific IRS forms. The 401(k) plan administrator will issue Form 1099-R, which reports the distribution, by January 31 of the year following the distribution. The IRA custodian will issue Form 5498, which reports IRA contributions, including rollovers, by May 31. These forms are informational and are used to ensure proper tax reporting to the IRS.

Important Considerations Before a Rollover

Before deciding to perform an in-service rollover, evaluate several factors to ensure the decision aligns with financial objectives.

Investment Options

One area to consider is the range of investment options and the degree of control offered. While 401(k) plans offer a curated selection of investment funds, IRAs provide a much broader array of choices, including individual stocks, bonds, and various mutual funds.

Fees and Expenses

Employer-sponsored 401(k) plans may have administrative fees, investment management fees, or other costs that differ from those associated with IRAs. Comparing these costs between the current 401(k) and potential IRA providers can impact the long-term growth of retirement savings.

Creditor Protection

Creditor protection also varies between 401(k)s and IRAs. Funds held in 401(k) plans receive strong federal creditor protection under the Employee Retirement Income Security Act (ERISA). The level of creditor protection for IRAs can depend on state laws and federal bankruptcy regulations, which may offer less comprehensive shielding than ERISA.

Access to Loans

Many 401(k) plans permit participants to take loans against their vested balance, providing a source of funds that must be repaid to the plan. IRAs, by contrast, do not offer loan provisions. An in-service rollover does not affect an employer’s matching contributions to the 401(k); these contributions continue as long as the employee meets the plan’s requirements.

Required Minimum Distributions (RMDs)

RMDs also have differing rules. For traditional IRAs, RMDs begin at age 73 (increasing to 75 in future years), regardless of employment status. However, for a 401(k) with a current employer, RMDs can be delayed past age 73 if the individual is still employed and not a 5% owner of the company.

Backdoor Roth IRA Strategy

Having pre-tax funds in an IRA can complicate a future “backdoor Roth IRA” strategy due to the pro-rata rule. This rule dictates that any Roth conversion from an IRA that holds both pre-tax and after-tax funds will be taxed proportionally, potentially leading to unexpected tax liabilities. This requires careful planning for those considering future Roth conversions.