In recent conversations, the question has come up as to whether you call rollover your 401k to a traditional IRA while still employed at the sponsoring employer. There seems to be some confusion about this and rumors of new laws that allow it.
The short answer to the question is, no. By law, you can not withdraw 401k contributions, that is, pre-tax salary deferrals, before severance, plan termination, turning 59 1/2, death, disability or hardship (and you can’t roll over hardship withdrawals).
The long answer is, yes, under certain circumstances, you can.
The standard exceptions do apply, for example, if you are 60 years of age or older, and still working, most qualified plans allow “age 59 1/2 rollovers”. If a particular plan does not, they most likely allow rollovers at age 65. The exceptions can add to the confusion and there is such a thing as the “in-service withdrawal”.
To me, the most interesting exception being the fact that the law only applies to your pre-tax salary deferrals. You CAN rollover (or otherwise withdraw) employer contributions, or employee (after-tax or rollover) contributions. And you can do so without any required taxes or penalties.
This can be a big deal. I know someone who’s matching contributions from his company were paid in company preferred stock and it ended up comprising a whopping 75% of his total plan holdings. He was not allowed, then, to diversify any matching funds elsewhere within the plan.
Being able to rollover the employer contributions was a great opportunity for him diversify his porfolio, get back to a better asset allocation, and contribute to more cost effective funds. But, it was not without penalty. The penalty (defined specifically by his company’s plan) was that he could not contribute to his plan for 12 months beginning from the day the withdrawal took place.
Some employer retirement plans have provisions for you to do a 401k rollover on some of the assets while you are still employed by the employer, but you’ll need to check with your employer to see if they allow it, and what penalties may be associated with it. Most 401k prospectuses and companies in general don’t make this common knowledge to employees.