Rollover 401(k) While At Current Job to IRA

Written by: Brian Nelson • Edited by: Rebecca Scudder
Updated Nov 15, 2010

You know that after you leave your job that you can rollover your 401(k) account to another qualified retirement plan like an IRA account. But, what if you want to rollover your 401k while you still work at your current employer?

401k Rollover While Still Employed

When you leave your current employer for a new job you can rollover your 401(k) plan account to your new employer’s 401(k) plan or to another qualified retirement plan like an IRA account. However, there is a little known provision that allows people to transfer money from their current employer’s 401(k) plan under certain circumstances. Typically, transferring the whole account balance isn’t allowed, but depending on your plan rules, you can transfer a significant part of your 401(k) account to a new retirement plan.

Of course, if you're under 59 1/2 you'll get hit with taxes and penalties, unless you roll your 401k account into an IRA.

In Service Distribution from 401(k) Plan

IRS rules permit something called an in-service distribution from several types of qualified retirement plans including 401(k) plans. An in-service distribution is one made while the employee continues to work at the company. In other words, you don’t have to separate from employment, that’s code for quit, retire, or get fired, in order to take your money out of your current 401(k) plan under certain circumstances.

Note that an in-service distribution is different than a hardship distribution which requires the employee to meet certain requirements and in most cases, for the money to be spent for specific uses only.

There are two ways an in-service distribution works. The most common is for employees who are age 59 ½ or older. Since these employees have already met the retirement age necessary for penalty-free withdrawals from a 401k, they can take some or all of their 401(k) money for any purpose they choose.

The other type is for employees who have not yet reached retirement age. For these employees, an in-service withdrawal is rolled into another qualified retirement plan. There is not age minimum required for this type of withdrawal since the transfer is not considered an early withdrawal if made by someone under age 59 ½. However, be certain that you have the right kind of account to transfer the money to, like an IRA, or else you may have to pay taxes and a 10% penalty on any withdrawal.

401k Plan Rules versus IRS Rules

There is a catch. Just because IRS rules and regulations allow for an employee to take an in-service withdrawal, that doesn’t mean that your employer’s 401(k) plan’s rules have to allow it.

There is no requirement for a 401(k) plan to allow for in-service withdrawals. So, you’ll have to check with your 401(k) plan administrator to find out if they are allowed in your specific plan.

Many companies don’t want to deal with the hassle of extra withdrawals, so they simply don’t allow them in their 401(k) plan. However, several large companies do allow such transactions, so it is worthwhile to at least check it out.

More 401(k) Information

The Bright Hub Investing Channel has more in-depth 401(k) information, including details on investing in 401(k) plans, RMDs or Required Minimum Distributions, and 401(k) Rollovers.

Mike Jan 5, 2011 12:25 PM

law vs. plan

Brian:
Thanks for your article and follow-up comments.

Lots of confusion out there, as far as I can tell.

Lots of folks can't / won't differentiate between law vs plan.

I believe we need to know whether THE LAW PROHIBTS in-service rollovers (ie. 401k to T-IRA).
The plan is of secondary importance as it can be changed.

As far as I know, DOL / EBSA / ERISA administers 401K and they (one person) said it does NOT prohibit i-s rollovers.
EBSA: "....You need to read your plan document"

Mike: "I don't care what the plan says. What does THE LAW say?"

EBSA: "ERISA doesn't prohibit i-s rollovers. Talk to the IRS"

Called up the IRS and they said rollovers ARE PROHIBITED.
Same from HR-Director.

Often times, the rationale is:
A rollover is a form of a distribution and, as such, prohibited
(under age 59.5, no special cisrumstances, etc.)(see IRS-575).

Unless we have clarity on what THE LAW says, and relevant backup / documentation, this discussion is just another bunch of speculation.

My 401K plan is poor and I would like to take my money to a private / self-directed T-IRA account but would hate to quit the job in order to do so.

Brian Nelson Nov 15, 2010 1:52 PM

Re: correction

Ken,
Thank you for your comment, however, I believe you are misunderstanding the article.

This article is about a ROLLOVER from a 401(k) plan at a current employer to a traditional IRA, not about withdrawing the money.

Both of the quotes you provide apply to withdrawing the money, not to rolling the funds into another qualified retirement plan.

This technique is a favorite of financial planners and brokers to get dollars out of a 401(k) plan where they cannot manage them (or charge for managing them) to an in-house IRA. Here is a link to an information page at Merrill Lynch about doing just this sort of thing: http://bit.ly/bQOUgY

If you prefer, here is a Forbes article about in-service withdrawals. The part about doing it when younger than age 50 is further down, so keep reading past the first few paragraphs. http://www.forbes.com/forbes/2008/0225/046.html

Hopefully this helps clear up any confusion.

Brian

ken Nov 4, 2010 4:12 PM

correction

This article is misleading at best, incorrect at worst. If a plan permits Roth conversions, a participant can only convert amounts that are otherwise distributable under the terms of the plan (as amended) and qualify as eligible rollover distributions. Under the Internal Revenue Code, the maximum extent to which in-service distributions are permissible depends on the type of contribution:

* Participant 401(k) deferrals are generally distributable only upon the participant's severance from employment, death, disability or attainment of age 59½.

* Employer matching and profit sharing contributions generally can be distributed while a participant is actively employed if the employer contributions have accumulated for a fixed number of years, upon the attainment of a stated age or upon any other stated event. Internal Revenue Service (IRS) rulings have clarified that the "fixed number of years" generally must be at least two years, but that a plan can permit a full distribution of all employer contributions after a participant has participated in the plan for a period of at least five years. These "two-year/five-year" rules are commonly accepted as the most liberal rules a plan can permit for in-service distribution of employer matching and profit sharing contributions.

I am not an attorny, but I did stay at a Holiday Inn lat night.

Peter Jun 17, 2010 7:49 PM

Tax Pub 575

I think this outlines that it can be done if allowed by 401k plan docs

Terry Hall Jun 10, 2010 3:59 PM

In Service Distributions prior to 59 1/2 and 401-K plan allows it

Any citations to support the ability to make a direct trustee to trustee roll over from a 401-K plan that allows in service distributions prior to age 59 1/5?

Randy Forsythe Sep 11, 2009 12:08 PM

401(k) in service rollover or transfers

This is an issue with very conflicting web commentary. It would be very helpful to all readers if one could point to the IRS ruling or language that backs this up, as it appears 401(k) plans were left out of the transfer/rollover language in the 2001 Federal Economic Growth and Tax Relief Reconcilation Act.

Rollover 401(k) While At Current Job to IRA

401k Rollover While Still Employed

In Service Distribution from 401(k) Plan

401k Plan Rules versus IRS Rules

More 401(k) Information

Comments