How to Complete an In-Service Distribution Rollover

An in-service distribution rollover allows an individual to move funds from a current employer’s retirement plan, like a 401(k), into another retirement account, such as an Individual Retirement Arrangement (IRA). This transaction is executed while the person is still employed by the company sponsoring the plan. It provides a way to change the management of one’s retirement savings without changing jobs and is distinct from a standard rollover that occurs after separating from an employer.

This transaction is a transfer of retirement assets from one tax-advantaged account to another. The rules are specific and must be followed carefully to maintain the tax-deferred status of the funds.

Determining Eligibility and Available Funds

The ability to take an in-service distribution is at the discretion of the employer and is governed by the rules of their specific retirement plan. The controlling document for these rules is the Summary Plan Description (SPD), which outlines if in-service distributions are permitted and under what circumstances. This document is the primary resource for determining if this option is available.

Many plans that permit these distributions require the employee to meet a specific trigger event, the most common being reaching age 59½. Some plans may have alternative provisions, such as allowing distributions after a certain number of years of participation, often five years. These rules are plan-specific, and one employer’s 401(k) may have very different requirements than another’s.

Not all money within a 401(k) account is treated the same for distribution purposes. Plans categorize funds by their source, and each may have different withdrawal eligibility rules. Employee pre-tax contributions are often accessible only after reaching age 59½, while funds from vested employer matches or profit-sharing contributions might be available under different conditions.

You must also understand the vesting schedule for employer contributions, as vesting determines ownership. If you are not 100% vested, you can only roll over the portion that you fully own. Rollover contributions, meaning money you previously moved into the current 401(k) from a former employer’s plan, are often the most flexible and may be eligible for an in-service distribution at any time, depending on the plan’s rules.

Information and Decisions for the Rollover

Before initiating a rollover, you must decide where the funds will go. The money must be moved into another eligible retirement account to maintain its tax-advantaged status. For most individuals, the destination is a Traditional IRA, which offers a much broader range of investment options than a standard 401(k) plan. Opening this new account before starting the rollover process is required, as the 401(k) plan administrator will need the new account information.

To complete the transaction, you will need to gather specific information. This includes the contact information for your current 401(k) plan administrator, your plan number, and your account number. For the destination account, you will need the name of the financial institution, the new account number, and any specific delivery instructions they require.

A primary decision is whether to use a direct or an indirect rollover. In a direct rollover, the plan administrator sends the money directly to the financial institution that holds your new IRA. The funds are never in your possession, and no taxes are withheld, making this the most common and straightforward method.

An indirect rollover is a more complex process where the plan administrator sends a check made payable to you. Your employer is required by the IRS to withhold 20% of the distribution for federal income taxes. You then have 60 days to deposit the full amount of the original distribution, including the 20% that was withheld, into your new IRA. To make up the 20% difference, you must use personal funds. If you fail to deposit the full amount within the 60-day window, the shortfall is considered a taxable distribution and may be subject to a 10% early withdrawal penalty if you are under 59½.

Once you have made these decisions and gathered the information, you must obtain the distribution request form from your 401(k) plan administrator. This form will require your personal details, the rollover amount, and the information for the destination account. You will also explicitly select whether you are requesting a direct or indirect rollover.

The Rollover Process Step-by-Step

The first step is to formally request the distribution from your 401(k) plan administrator. This involves submitting the completed application package through the channels they specify, such as an online portal, mail, or fax.

After you have submitted the request, the plan administrator will begin its internal review and processing. You should receive a confirmation notice indicating that your request has been received and is being processed. This notice may be delivered electronically or by physical mail.

The timeline for the transfer of funds typically takes between 7 to 14 business days from the time the request is approved. During this period, the plan administrator will liquidate the necessary investments in your 401(k) and transmit the funds. For a direct rollover, the check will be made payable to your new IRA custodian and sent either to you to forward or directly to the new institution.

The final step is to verify that the funds have arrived in the destination account. You should monitor your new IRA and contact the financial institution if the funds do not appear within the expected timeframe. Once the deposit is confirmed, you must then ensure the money is invested according to your financial goals, as rollover funds are often initially placed in a cash-holding position.

Tax Reporting and Post-Rollover Considerations

After completing a rollover, you will receive tax documentation from your former plan administrator. By January 31 of the year following the distribution, they will send you IRS Form 1099-R, “Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.” This form reports the distribution to you and the IRS, and you should review it for accuracy.

A key field on this form is Box 7, which contains a distribution code. For a direct rollover from a 401(k) to a Traditional IRA, this box should contain the code ‘G’. This code signals to the IRS that the transaction was a non-taxable transfer. When you file your annual income tax return, you will report the gross distribution amount on Form 1040, but the ‘G’ code ensures it will not be counted as taxable income.

Once the funds are in your new IRA, they are no longer governed by the rules of your old 401(k) plan but are subject to all IRA rules and regulations. This change has several implications. The “still working” exception, which allows some 401(k) participants to delay Required Minimum Distributions (RMDs) past the standard age, does not apply to Traditional IRAs. You will need to begin taking RMDs from the IRA once you reach age 73, regardless of your employment status.

You are now responsible for managing the investments in the new IRA. The new account structure and rules require careful attention to ensure continued compliance and alignment with your long-term financial strategy.