Can You Rollover a 401k While Still Employed?

A 401(k) is an employer-sponsored retirement savings plan that allows employees to save and invest for retirement on a tax-deferred basis. A rollover involves transferring funds from one retirement account to another, maintaining their tax-advantaged status. Individuals might consider a 401(k) rollover, even while still employed, to consolidate multiple retirement accounts or potentially gain different investment options. This process can offer greater flexibility in managing retirement savings. Understanding the conditions and procedures for such a transfer is important for effective financial planning.

Determining Eligibility for In-Service Rollovers

The ability to roll over funds from a 401(k) while still employed depends on the specific rules of the employer’s plan, often referred to as an “in-service distribution” or “in-service rollover.” Not all 401(k) plans permit these types of distributions. Eligibility is determined by provisions outlined in the plan document, which dictates when and under what circumstances funds can be accessed before separation from service.

Many plans allow in-service rollovers once an employee reaches a certain age, such as age 59½, or after a specified number of years of participation. Another common provision permits rollovers of vested employer contributions or employee after-tax contributions, even if other contributions remain restricted.

To determine if an in-service rollover is an option, individuals should consult their plan’s Summary Plan Description (SPD). This document provides a detailed overview of the plan’s rules, including eligibility for distributions. Alternatively, contacting the plan administrator, often the human resources department or the plan provider, can clarify specific eligibility requirements and available options for your account.

Understanding Rollover Destinations

Once eligibility for an in-service rollover is confirmed, the next step involves identifying suitable destinations for the funds. A common choice for pre-tax 401(k) funds is a Traditional Individual Retirement Account (IRA). Rolling over to a Traditional IRA allows the funds to maintain their tax-deferred status, meaning taxes are not paid until retirement withdrawals begin.

Another option is to roll over pre-tax 401(k) funds to a Roth IRA, which is known as a Roth conversion. This transaction is a taxable event in the year it occurs, as the converted amount is added to the individual’s gross income. However, qualified distributions from the Roth IRA in retirement are typically tax-free.

Funds from a previous employer’s 401(k) can often be rolled into a current employer’s qualified plan, such as a 401(k) or 403(b), if the new plan accepts such rollovers. This allows for consolidation of retirement assets within a single employer-sponsored plan. When moving funds, a “direct rollover” is generally preferred to ensure the funds move directly from one custodian to another without the account holder taking possession, which helps avoid immediate tax complications.

Navigating the Rollover Request

The first step involves identifying the correct plan administrator for your 401(k), which could be your employer’s HR department or a third-party plan provider. You will need to gather essential account information from your source 401(k), including account numbers, current balances, and the vested amount available for distribution.

Next, select the receiving institution for your rollover, such as a brokerage firm for an IRA or your current employer’s plan administrator if you are consolidating an old 401(k) into a new one. Obtain the necessary account and routing information from this receiving institution, as these details will be crucial for the transfer.

Once prepared, contact the source plan administrator to formally request the rollover, which may involve completing specific forms provided by both the source plan and the receiving institution. The funds are typically transferred either via a check made payable to the new institution for your benefit or through an electronic transfer.

Tax Implications of Rollovers

When a direct rollover occurs, where funds are transferred directly from your 401(k) to another qualified retirement account, the transaction is generally tax-free. This method ensures that the money never passes through your hands, thus avoiding immediate taxation or penalties.

In contrast, an indirect rollover involves the funds being distributed directly to you, and you then have 60 days from the date of receipt to deposit them into another qualified retirement account. If you miss this 60-day deadline, the distribution becomes taxable as ordinary income, and if you are under age 59½, it may also be subject to a 10% early withdrawal penalty. For indirect rollovers from a 401(k), the plan administrator is required by law to withhold 20% for federal income tax.

If you choose an indirect rollover, you must deposit the full amount of the distribution, including the 20% withheld, into the new account within the 60-day period to avoid taxation on the withheld portion. The 20% withheld amount will then be recovered as a tax credit when you file your income tax return. Converting pre-tax 401(k) funds to a Roth IRA during a rollover is considered a taxable event, and the entire converted amount is added to your gross income for the year of conversion. It is important to note that the “one rollover per year rule” applies only to indirect IRA-to-IRA rollovers and does not restrict 401(k)-to-IRA rollovers or direct rollovers.