To be honest, most of us only think about rolling over our 401(k) when we’re cleaning out our desks and saying goodbye to coworkers in a sad way. But what if I told you that you might be able to roll over your 401(k) and still get paid by the same company?
Yep, it’s true! This option, sometimes called an “in-service rollover,” could open up new investment possibilities without the need to dust off your resume. But is it right for you? Let’s dive into everything you need to know about rolling over your 401(k) while still employed.
The Short Answer: Yes, You Can (Usually)
You can roll over your 401(k) while still working for the same company, so the short answer is yes. But not all plans let you do that, so before you get too excited, check the rules of your plan.
According to Ameriprise Financial, numerous 401(k) plans allow employees to transfer funds to an IRA while they’re still with their employer. This option can help you manage your retirement savings more effectively and potentially diversify your investments beyond what your employer’s plan offers.
Why Consider Rolling Over Your 401(k) While Still Employed?
You might be wondering why someone would do this if they aren’t going to change jobs. Well, there are actually several compelling reasons:
1. More Investment Options
One of the biggest limitations of employer-sponsored 401(k) plans is their restricted menu of investment options. Your company’s plan might offer just a handful of mutual funds or target-date funds selected by the plan sponsor.
By contrast, rolling funds into an IRA can dramatically expand your investment universe. You’ll gain access to:
- Individual stocks and bonds
- A wider range of mutual funds and ETFs
- Managed accounts
- REITs (Real Estate Investment Trusts)
- Alternative investments
- And much more!
This broader selection can help you build a more diversified portfolio tailored to your specific goals and risk tolerance.
2. Better Downside Protection
As retirement approaches protecting your nest egg from market downturns becomes increasingly important. Unfortunately some 401(k) plans don’t offer investment choices that allow you to lock in gains or shield your savings from volatility.
In an IRA, you might have access to:
- Annuities
- Certificates of deposit
- Structured products
- Other more conservative investment options
These can provide better protection against unexpected market downturns when you need it most.
3. Greater Control
With a 401(k), the qualified plan trustee owns the plan, and your access may be restricted during blackout periods. These are times when the plan administrator limits participant transactions while making changes to the plan.
You are the owner of an IRA and have full access to it. You can access your assets at any time, so you have more control over your retirement savings.
4. Flexible Distribution Options
IRAs typically offer more flexibility when it comes to taking distributions. You can choose when to withdraw funds and select the amount of tax withholding that works for you.
By contrast, 401(k) plans have more rigid distribution rules and require mandatory 20% withholding on distributions. This flexibility can be valuable as you approach or enter retirement.
4 Reasons You Might Want to Keep Your Money in Your 401(k)
Before you start filling out rollover paperwork, it’s important to consider some potential downsides:
1. Temporary Contribution Ban
Some employers impose a temporary ban on further 401(k) contributions if you withdraw funds while still employed. This could significantly impact your retirement savings, especially if you’re in your peak earning years.
2. Early Retirement Considerations
If early retirement is on your horizon, keeping money in your 401(k) might be advantageous. Most 401(k) plans allow penalty-free withdrawals after age 55 for early retirees. With an IRA, you generally need to wait until 59½ to avoid the 10% early withdrawal penalty.
3. Potential Fee Increases
IRA investors sometimes pay higher fees than they would in employer-sponsored plans. The broader range of investment options available in an IRA can come with higher costs. It’s essential to compare fees before making a decision.
4. No Loan Options
Many 401(k) plans allow you to borrow against your balance while you’re employed. This option disappears if you roll the money into an IRA, as IRAs don’t permit loans. If you think you might need to access these funds before retirement, this could be an important consideration.
Your Rollover Options: What Can You Do With Your 401(k)?
If you’re considering moving your 401(k) funds, you actually have several options to choose from:
1. Roll Into a Traditional IRA
This is probably the most common choice for in-service rollovers. You won’t owe taxes on the transfer, and your money continues growing tax-deferred until you take distributions in retirement.
Pros:
- Direct ownership (no employer involvement)
- Wider investment selection
- Simplified RMDs (you can aggregate across all traditional IRAs)
Cons:
- May not be eligible for future 401(k) rollovers
- Required minimum distributions (RMDs) start at age 73 regardless of employment status
- Different creditor protection than 401(k)s
2. Convert to a Roth IRA
If you’re willing to pay taxes now for tax-free growth later, converting to a Roth IRA could be attractive.
Pros:
- Tax-free withdrawals in retirement (if you’re over 59½ and have held the account for five+ years)
- No required minimum distributions
- Potential estate planning benefits
Cons:
- You’ll owe taxes on the conversion amount in the current year
- Could push you into a higher tax bracket
- Five-year holding requirement for tax-free withdrawals
- Potential 10% early withdrawal penalty if accessed before 59½
3. Roll Into Your Current 401(k)
If your current plan accepts rollovers from previous 401(k)s, this option allows you to consolidate your retirement savings.
4. Leave It Where It Is
Sometimes the simplest option is to do nothing and leave your money in your current 401(k).
5. Cash Out (Not Recommended!)
While cashing out provides immediate liquidity, it comes with serious downsides including taxes, penalties, and derailed retirement goals.
How to Determine If You’re Eligible for an In-Service Rollover
Not all 401(k) plans allow in-service rollovers, so here’s how to find out if yours does:
- Check your plan documents: Your Summary Plan Description (SPD) should outline rollover rules.
- Contact your HR department: They can tell you if in-service rollovers are permitted.
- Call your plan administrator: The company that manages your 401(k) can explain your options.
If in-service rollovers are allowed, ask about:
- Any age requirements (some plans only allow this after age 59½)
- Which types of contributions can be rolled over (employee contributions, employer match, profit-sharing, etc.)
- Any restrictions or waiting periods
Step-by-Step Process for Rolling Over Your 401(k) While Employed
If you’ve decided an in-service rollover makes sense for you, here’s how to do it:
- Confirm eligibility: Verify that your plan allows in-service rollovers.
- Choose your destination: Open an IRA if you don’t already have one.
- Request the rollover: Contact your 401(k) administrator to initiate the process.
- Opt for a direct rollover: This avoids mandatory withholding and potential tax penalties.
- Invest your rolled-over funds: Once the money reaches your IRA, choose your investments.
- Continue contributing to your 401(k): Keep funding your workplace plan, especially if you receive an employer match.
Real-World Example: Meet Sarah
Sarah has been with her company for 15 years and has accumulated $250,000 in her 401(k). She’s frustrated by the limited investment options and high fees in her plan. After researching her options, she discovers her plan allows in-service rollovers for employees over 55 (she’s 57).
She decides to roll $200,000 into an IRA while keeping $50,000 in her 401(k) to maintain her loan eligibility. In her IRA, she creates a more diversified portfolio with lower fees, potentially saving thousands in expenses over time. She continues contributing to her workplace 401(k) to receive her employer’s 6% match.
Common Questions About In-Service 401(k) Rollovers
Do I have to roll over my entire 401(k) balance?
No, many plans allow partial rollovers, letting you keep some money in your 401(k) while moving some to an IRA.
Will I owe taxes on an in-service rollover?
Not if you do a direct rollover from your 401(k) to a traditional IRA. However, if you roll over to a Roth IRA, you’ll owe taxes on the converted amount.
Can I still contribute to my 401(k) after doing an in-service rollover?
Usually yes, but some employers impose temporary restrictions. Check your plan rules.
How often can I do in-service rollovers?
This depends on your plan. Some allow unlimited rollovers, while others have frequency limitations.
The Bottom Line: Is an In-Service Rollover Right for You?
Rolling over your 401(k) while still employed can offer greater investment flexibility and control, but it’s not the right move for everyone. Consider your unique financial situation, retirement timeline, and investment goals before making a decision.
If your 401(k) has high fees and limited investment options, and your plan allows in-service rollovers, this strategy might significantly benefit your retirement savings. On the other hand, if you have a great 401(k) plan with low costs and solid investment choices, there may be little reason to roll over your funds.
I always recommend consulting with a financial advisor who can analyze your specific circumstances and help you make the best choice for your retirement future. Your retirement savings are too important to make decisions based solely on general advice.
Final Thoughts
Your retirement journey is uniquely yours, and the decisions you make about your 401(k) should align with your personal goals and circumstances. Whether you choose to roll over your 401(k) while still employed or keep your money where it is, the most important thing is making an informed decision that supports your long-term financial well-being.
Remember, retirement planning isn’t a one-time event but an ongoing process. Regularly reviewing your options and adjusting your strategy as needed will help ensure you stay on track for the retirement you deserve.
Have you considered rolling over your 401(k) while still employed? What factors are most important in your decision? I’d love to hear your thoughts and experiences in the comments below!
4 reasons why you may want to roll over your 401(k) to an IRA while you’re still with your employer
- Diversification. Your plan sponsor can choose which investments you can make in your 401(k). When you move your money into an IRA, you may be able to invest in more things. If you have more options, you may be able to diversify your retirement portfolio more and invest in a wider range of asset classes, such as stocks and bonds, managed accounts, REITs, and other options.
- Downside protection. In some 401(k) plans, you might not be able to choose investments that will let you keep the money you’ve earned over the years. It’s more important as you get closer to retirement age to protect your retirement plan against a sudden drop in the market. If you have an IRA, you may have more options when it comes to annuities, structured products, and certificates.
- Ownership control. With an IRA, you own it and can get to it whenever you want. You can also not lose the money in your IRA during blackout periods. A qualified plan trustee owns a 401(k) plan. During blackout periods, participants may not be able to make certain transactions with their assets, such as withdrawals or changes to their investments.
- Distribution options. IRAs give you the freedom to take withdrawals whenever you want and let you choose how much to be taken out. Withdrawals from a 401(k) plan are limited by the plan’s rules and must be subject to mandatory withholding.
But, can you roll over a 401(k) while still employed with the same company?
The short answer is yes – you can roll over your 401(k) while still employed at the same place. Leaving an employer isnt the only time you can move your 401(k) savings. Sometimes it makes sense to roll over your 401(k) assets while you continue to work and make further contributions to your company plan. These rollovers may help you more effectively manage your retirement savings and diversify your investments.
It is important to really weigh the pros and cons when considering this. But first, do some checking to see if youre eligible. Not every plan allows you to transfer your 401(k) to an IRA while still employed.