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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.
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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.
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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.