Can You Transfer Money From 401(k) to IRA While Still Employed?

Saving for retirement is a fundamental aspect of financial planning, with employer-sponsored 401(k) plans and individual retirement arrangements (IRAs) serving as primary vehicles for accumulating wealth. A 401(k) is an employer-sponsored, defined-contribution plan that allows employees to contribute a portion of their paycheck, often before taxes are deducted, into an investment account. Many employers also offer matching contributions, which can significantly boost savings.

IRAs, on the other hand, are personal retirement savings accounts offering tax benefits, which individuals can open independently through financial institutions. Both account types provide tax advantages, such as tax-deferred growth for traditional accounts, meaning investments can grow without annual taxation. While 401(k) funds are commonly accessed after leaving an employer, individuals often wonder if they can transfer these funds to an IRA while still employed.

Eligibility for In-Service Rollovers

Transferring funds from a 401(k) to an IRA while still employed, known as an in-service rollover or in-service distribution, is not universally permitted. Eligibility depends primarily on your employer’s 401(k) plan provisions. To determine if your plan offers this option, consult your plan’s Summary Plan Description (SPD) or contact your plan administrator directly.

A common condition for in-service non-hardship withdrawals, which can then be rolled over, is reaching age 59½. Participants aged 59½ or older can take distributions from their 401(k) deferral accounts without incurring the 10% early withdrawal penalty. The Internal Revenue Service (IRS) allows distributions of elective deferrals once a participant reaches this age, provided the plan permits it.

Beyond age, the type of contributions within your 401(k) account also impacts eligibility for in-service rollovers before age 59½. Only vested employer contributions or after-tax employee contributions are eligible for in-service rollovers if the plan allows. Vested contributions refer to the portion of employer contributions that you legally own and cannot be forfeited. Your own contributions to a 401(k) are always 100% vested.

Pre-tax employee deferrals are not eligible for in-service rollovers before age 59½. There are limited exceptions, such as when the plan terminates or other specific conditions are met. The employer’s plan document is the ultimate authority on what is permissible for its participants.

Rollover Types and Tax Implications

When transferring funds from a 401(k) to an IRA, two primary methods are available: a direct rollover or an indirect rollover.

A direct rollover, also known as a trustee-to-trustee transfer, involves the funds moving directly from your 401(k) plan administrator to your chosen IRA custodian. You never physically receive the money. The 401(k) administrator may issue a check payable to your new IRA custodian or initiate a wire transfer. This approach is preferred because no taxes are withheld from the transferred amount, and it helps avoid issues with the 60-day rollover rule.

An indirect rollover, or 60-day rollover, occurs when the funds are distributed directly to you. If the distribution consists of pre-tax funds, your 401(k) plan administrator is required to withhold 20% for federal income taxes. You then have 60 days from the date you receive the distribution to deposit the full amount, including replacing the 20% that was withheld, into an IRA or another eligible retirement plan. Failing to deposit the full amount within this 60-day window means the unrolled portion becomes a taxable distribution, and if you are under age 59½, it may be subject to an additional 10% early withdrawal penalty.

You have the choice between rolling over pre-tax 401(k) funds into a Traditional IRA or converting them to a Roth IRA. Rolling funds into a Traditional IRA maintains their tax-deferred status, meaning taxes will only be due upon withdrawal in retirement. If you convert pre-tax 401(k) funds to a Roth IRA, the amount converted is considered taxable income in the year of conversion. Qualified withdrawals from a Roth IRA in retirement are tax-free.

If your 401(k) contains after-tax contributions, these can be rolled into a Roth IRA without generating a taxable event, as taxes have already been paid on these amounts. Any earnings on these after-tax contributions rolled to a Roth IRA would be taxable upon conversion. Distributions from retirement accounts are reported to you and the IRS on Form 1099-R. This form details the gross distribution, taxable amount, and any federal income tax withheld for accurate tax reporting.

Steps to Complete a Rollover

The process of executing an in-service rollover involves several practical steps.

Your first action is to contact your current 401(k) plan administrator. Inquire about their specific procedures for in-service rollovers and request any necessary forms. They can provide information on what types of funds are eligible for an in-service distribution from your plan.

Next, open a new Individual Retirement Account if you do not already have one. This involves selecting an IRA custodian, such as a bank or brokerage firm, and choosing the appropriate type of IRA (Traditional or Roth) to receive the funds. Consider investment options, fees, and customer service when choosing a custodian for your new IRA.

After establishing your IRA, complete the rollover forms provided by your 401(k) administrator. These forms require information about your current 401(k) account, details of the recipient IRA, and your preference for a direct or indirect rollover. Accurately filling out all fields, including account numbers and custodian information, helps prevent delays.

Once the forms are complete, submit them along with any required supporting documentation to your 401(k) plan administrator. This may involve mailing physical documents or submitting them electronically, depending on your plan’s procedures. Some plans may require additional signatures or notarization, so verify all submission requirements beforehand.

Finally, track the transfer process diligently. Confirm with both your 401(k) administrator and your new IRA custodian that the funds have been successfully transferred and received. Maintain records of all correspondence, forms, and transaction confirmations for your financial records and tax purposes.