Can I rollover my 401k while still employed?
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.
This is always a confusing topic. Thanks for the helpful post. It’s something everyone should look into, particularly if they are in a less-than-great plan.
Thanks,
pf101
[...] Money tackles the question: Can I rollover my 401k while still employed (with the plan [...]
The secret to finding out if your 401(k) lets you do a partial rollover while you are still employed is to ask the right question. Ask if your plan allows “in service distributions”. If it does, then you can at least do a partial rollover/transfer. However, most 401(k)’s do NOT allow them.
Art Dinkin, CFP
If the plan allows for an “in-service” ira rollover, and the employee/participant is under 59 1/2, is there any “tax liability”?
Howard,
If you are rolling over qualified contributions, (employer contributions, or employee after-tax or rollover contributions), there is no tax liability. Again, the only possible penalties would be those specifically defined by the 401k plan.
[...] I thought I’d seen somewhere that you can roll over a portion of your 401k without leaving your employer (under certain circumstances) – here’s a summary… Can I rollover my 401k while still employed? [...]
This article is incorrect as I have completed many still employeed 401K rollovers for my clients. It is not a taxable event because you moving the money from one tax deffered (401K) account to another tax deffered account (Traditional IRA). In addition every subsequent year you can move more money out of your 401K. What are the benefits? I’m glad you asked!
1) You have access to many thousands more mutual funds. Whereas your selections are limited in your current 401K.
2) Better diversification. Your 401K may have 20 funds but I, as a professional can give you access to over 8000.
3) Professional Advice, whereas in 401K people generally choose funds in the dark. I can give you access to solid fund research.
4) I can also put you in a NY Life Product that guanrantees your rollover amount. So this become the minimum amount you will ever receive should the market crash or take a dramatic drop. If you rollover 100K that is the minimum you will ever get back.
But in a nutshell you can Rollover money from your 401K tax, into a T. IRA tax and penalty free no matter how old you are! I do it at least once a month for someone!
I’m still confused. My situation is that I’m 30, have considerable credit card debt, and a 401K with my current employer that would cover about half of my debt if I could access it (taking into account early withdrawl fees and taxes). So, can I rollover? Perhaps into a Traditional IRA, then into a ROTH?
Gret,
There is no IRS law that prevents you from rolling over money from your 401k while you are employed. However, many 401k plans don’t allow it, so you’d need to check with your 401k plan administrator to know for sure. Be aware though, that withdrawing the money to pay debt and rolling it over into an IRA are two very different events.
Thanks Clint. From what I understood, I wouldn’t be able to simply cash out of my 401K to pay off debt, and that I would need to roll into a T. IRA, then a ROTH.
I have a feeling they won’t let me take it out, and it just seems shady. It’s unfortunate because ultimately I would save more for my retirement if I weren’t paying interest on debt.
If they don’t allow a rollover, could I go to the owner of my company and ask him to change the rule, or would he be locked in to an aggreement with the 401K plan admin.?
I have recently graduated from college.
I find this “Inservice Withdrawal’ feature very attractive now that I am on the job hunt. Is there a list out there of (GOOD) companies that offer this feature to help narrow my job hunt search.
AWSOME INFO GUYS!!!!!!!
Hi , If Lamont is still on this board… hey do me a favor and drop me an email because I have a 401(k) at my wife’s current company that [the administering company] will not rollover in any way whatsoever, and when I complained about it …
[The administering company] contacted my wife’s employer and tried to get my Wife in trouble with the company. As if they have a legal right to threaten not only the vested assets of the plan but also my wife’s future employment with the company.
Drop me a line Lamont because I tried quoting them the Pension Protection Act of 2006 Section 824… I tried doing it as a partial … I tried everything and they basically tried to tell me that whatever the PLAN rules say… as if it’s up to the Plan administrator to determine for PEOPLE who were vested before the company was ever bought out to determine how someone’s assets are invested for the next 20 years.
They really ticked me off and basically thumbed their noses at me when I tried to tell them that they had to release the funds. And THEN on top of that , they tried to threaten my wife’s employment with the company.
I’m at buddhak0n@verizon.net .. Oh and by the way I’m the only Law School graduate in the conversation . Imagine that . Sorry but this industry is screwed people . Spitzer for all his faults had them dead right.
Hi Brian,
Although there is no law on the books that prevents you from rolling over a portion of your 401K while your still employed the “Plan Rules” seem to become similar to such a law. In my experiences I have come across many plans that limit such a transaction in fear that the employee may damage their future retirement income and I have come across an equal amount of companies that allow such a transaction. So, long story short, if the Plan Rules say you can’t do it, then well, you can’t do it! If you have the power to change the rules then you’re a powerful person.
It is a coincidence that your email address is hosted by “Verizon” because they are one such company that allows such a transaction for their employees. Their 401K is managed by Fidelity.
I would be interested in seeing if you could get the rules of the plan changed via an employee petition. I would use the points I listed above as reason why the company should make the change. Of course the managing company (Fidelity, etc) won’t be too happen about the change because people can move their money freely but it will benefit the employees if they are smart investors.
Good Luck!
Hi Dave,
There is no such list. The best way to find out is to ask the plan administrator or the plan manager. Also, just because the company allows this feature doesn’t mean they are a good company.
Hey all,
I’m in what might be an unusual situation. I have a 401K with the company that I work for. I worked for them for 7 years in the US, then in December 2007 I transferred to work for a subsidiary in Europe. I am now employed by the European company. I can no longer pay into my US based 401K, no longer get paid by the US company, no longer have US benefits etc. Instead I’m employed under a European contract that provides a local pension similar to 401K, local benefits, etc.
I want to get my old US based 401K into Euro based stocks. Since I’m no longer employed by the company in the US I thought there should be no issue getting the funds rolled over to an IRA that would give me more investment options. However the administering company is saying that since I still work for the same parent company that I can’t roll the money over out of their plan.
Do you think this is correct, and if so is this an IRS rule, or is this a rule that the administering company is setting? Can I challenge it in any way?
Thanks for your help!
Kieran.
I need a book on the subject of in-service-withdrawals from a credible source.
Any suggestions?
I have pretax funds in my 401k that is totally contributed by me. My plan says that I can’t rollover my fund to any other plan. I’m trying to research how I can make this happen. If I have more investment options in an Traditional IRA why keep contributing to the 401k plan.
I am currently a pension administrator and process many distributions that are rollovers. In order for any distribution to be “rolled over” it must meet the criteria as given in the article listed above.
“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 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”.
Rollover distributions must also be rolled over to another qualified plan or to an IRA. After working about a year in the retirement plan industry I have not seen any exceptions to these rules.
To answer Gerald’s question as to why you would contribute to a 401k when you have more options in an IRA: The match that you receive from your employer, and the higher contribution limits for tax-deferred contributions. Generally speaking your employer will match, up to a certain percentage, whatever amount you contribute. This is free money being offered by your company as an incentive for you to save for retirement. Once you have taken full advantage of the match, there is no other reason to contribute beyond that percentage – you would be better off contributing the excess amount to an IRA, or even just a taxable brokerage account – if you’re not in a high tax bracket, the tax deferred compounding on your investment certainly helps but doesn’t have such a dramatic impact as if you were in a higher tax bracket . The IRA contribution limit for an individual in 2008 is $5000 vs $15,500 for 401ks (this is assuming you’re under 50 years of age. Over age 50 the IRA limit is $6000 and 401k limit is $20,500. An additional benefit of a 401k vs. an IRA is the ability to borrow from your 401k in the form of a loan (as opposed to withdrawing the funds from your 401k which is a taxable event and in addition the IRS will slap you with a 10% penalty if you’re under the age of 59 1/2) which is not available in an IRA.
There are a number of larger corporations that offer “in service withdrawals” and the ability to do so is based on the 401k plan documents which you can obtain from the Third Party Administrator (TPA).
wow, this is great dialog, thanks everyone for the fantastic comments. In one article I learned more than about 4 days of random browsing of “articles”
To everyone I recently found this article and wanted to add my $0.02:
First and foremost the plan must have the “In-service” withdrawal provision in the plan document in order to rollover 401k dollars into an IRA (expect to get a lot of resistance from the broker or Third Party Administrator (TPA) if this is not already in the plan because less plan assets equals less money to be made by both). Provisions for an age and length of service at a company must be made as well. So for instance say you must be age 40 and have at least 5 years of service (this helps with companies that have vesting schedules and you will see why this is important below).
Secondly there are three types of money that can be rolled from a current 401k into your own IRA they are:
1.) Money rolled over from a previous 401k (either through a plan change or from a previous employer)
2.) Matching/Profit Sharing contributions from the Employer
3.) Money Growth inside the 401k Plan
Ironically the only money that “cannot” be moved prior to age 59-1/2 is the money that you as the employee voluntarily contributed.
So say we have Bob Jones who has contributed $10,000 per year for the last 10 years and his company matches his full $10,000 each year and his account has grown to $250,000
His money is classified as follows:
Voluntary contributions: $100,000
Employer Match: $100,000
Growth: $50,000
If his company had an “In-Service” provision he can move both the match and growth into his own IRA ($150,000 total) prior to age 59-1/2. He cannot however move the $100,000 he voluntarily contributed.
Hope that helps,
Josh Smith
First off,
Lamont is giving incorrect information. Section 401(k)(2)(B) and Section 403(b)(11) define when employees may take distritubtions… Last time I checked the IRC is a form of law…
Chris said it best by saying
“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).”
Plan rules can are capalbe of being even more strict while someone is still employed.
Josh mentioned
“Secondly there are three types of money that can be rolled from a current 401k into your own IRA they are:
1.) Money rolled over from a previous 401k (either through a plan change or from a previous employer)
2.) Matching/Profit Sharing contributions from the Employer
3.) Money Growth inside the 401k Plan”
I cant find legal guidance on this yet but have been checking. I have been reading up on Section 414(w) and the proposed reg for this, but I am not sure if it applies.
Bottom line, there is much confusion about this stuff, when maybe there shouldnt be.
can i rollover my existing my 401k if my company is no longer contributing / matching my %
My father retired in 1995 ,…wondering how can i find out how much is this worth ? his 401 k ?
He passed away in 2003 and we totally forgot that he has this?
and how do I trace it down.
My 401k account lost $100k last year – 1/3 of my balance! On top of that, my company just suspended matching funds. I’d like to get out of this plan but am being told by the plan administrators that the only way I can do that is to end my employment. I don’t want to withdraw money, just roll it over to an IRA or something. This is ridiculous, other than leaving a company I have been employed with for 20 years, what can I do? I can’t just sit here and watch all my savings evaporate!! The plan administrator says it’s an IRS rule but I’m not so sure after reading some of these posts…
Lynn,
If your goal is to move your money into an investment that will not lose money, you can almost certainly accomplish that without pulling your money out of the 401(k) plan. Your plan probably offers a money market or guaranteed fund of some sort. Likewise, you if you invested in an IRA, you could very easily lose as much or more as you’ve lost in the 401(k). It’s not about 401(k) vs. IRA. It’s all about what how you choose to invest within either of those arrangements.
Whether you should move your money to one of these more stable accounts is a different question. I don’t know you so won’t give you advice.
I’m a fee-based 401(k) consultant that works with a dozens of plans around the U.S. and has a low tolerance for hucksters. My warning — as one with nothing to sell — is this: Beware those who are encouraging in-service rollovers out of 401(k) into IRA’s. Bad guys are preying on frustrated investors right now and they do not care about you. They will probably also tell you that they had all their clients bet on the Giants in the 2008 Super Bowl. Stay in your 401(k) plan and see what advice services are available to help you make no-nonsense investment decisions from this point forward.
My company is probably going to stop the matching on our 401K. Does this qualify as a plan changing event? I had a 5 % match. This helped when the prices dropped. I only lost matched funds. I have a little over 7k in the fund. Would you suggest i keep contributing my own funds, or stop now and invest in the market on my own. I do not think I can withdraw my funds without a penalty, so I most likely have to leave what I have in there alone. Any suggestions would be welcome
Our company has been working with many right now on “in service distribution”. This is a time when you need to look at security. We roll alot of employer contributions into indexed annuities. I know everybody has there opinions on growth and everything, but I am telling you one thing, at least last year none of our clients lost any of there initial investment. Yes there where very minimmal gains, but no loses.
If you would like help on seeing if your company allows for “in service distributions”, just let me know and I would be glad to discuss it with you. Imagine being in a product where your prinicpal is safe, and you only take part in the market gains, not the market losses.