In-Service 401(k) Rollover
An in-service 401(k) rollover is the direct or indirect rollover of an employee’s assets from a 401(k) into an IRA while the employee is still employed. Unlike a traditional 401(k) rollover, an in-service rollover allows your assets to transfer into an IRA without changing jobs.
- Written By Marguerita M. Cheng, CFP®, CRPC®, RICP®
Marguerita M. Cheng, CFP®, CRPC®, RICP®
Marguerita M. Cheng, CFP®, CRPC®, RICP®, is the chief executive officer at Blue Ocean Global Wealth. As a Certified Financial Planner Board of Standards Ambassador, Marguerita educates the public, policymakers and media about the benefits of competent and ethical financial planning. She is a past spokesperson for the AARP Financial Freedom campaign.Read More
- Edited ByLamia Chowdhury
Lamia Chowdhury is a financial editor at Annuity.org. Lamia carries an extensive skillset in the content marketing field, and her work as a copywriter spans industries as diverse as finance, health care, travel and restaurants.Read More
- Financially Reviewed ByThomas J. Brock, CFA®, CPA
Thomas J. Brock, CFA®, CPA
Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.Read More
- Updated: February 24, 2023
- 7 min read time
- This page features 2 Cited Research Articles
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What Is an In-Service 401(k) Rollover?
An in-service rollover is the transfer of the assets in an existing 401(k) plan to an IRA while an employee is still employed by the employer sponsoring the 401(k) plan.
An in-service rollover to an IRA is a retirement planning strategy that has been used by employees who value the flexibility of IRAs. There are three main reasons why many people prefer rollovers — IRAs can be cheaper than 401(k) plans, IRAs provide more investment options and IRAs give the account holder more control.
Because the IRS does not treat an in-service rollover as a distribution, the plan participant does not have to pay taxes when making a rollover into a traditional IRA. Taxes will only be payable when the account holder withdraws money from the traditional IRA later.
However, taxes will apply if the rollover is into a Roth IRA, since Roth IRAs only accept post-tax funds. Once the funds have been taxed, the account holder can make tax-free qualified withdrawals from the Roth IRA.
An in-service rollover could enable you to expand your retirement account investment options and/or reduce administrative fee drag. That said, in order to avoid tax consequences, make sure you execute your rollover between like accounts, which means moving money from a traditional 401(k) to a traditional IRA (not a Roth IRA).
How Does an In-Service 401(k) Rollover Work?
An in-service rollover 401(k) works like a typical rollover. It can be a direct rollover where the custodian of the 401(k) transfers the funds into an IRA without liquidating the underlying assets or where the custodian liquidates the assets but writes a check in the name of the IRA rather than the account holder.
It can also be an indirect rollover where the custodian of the 401(k) liquidates the assets and writes a check in the name of the account holder.
In both cases, the account holder should seek to complete the rollover within 60 days, according to an article from the IRS. However, in the case of an indirect rollover, the 60-day window is a requirement. So, for an indirect rollover to not be treated as a distribution (and thus, taxable), it must be completed within 60 days, in accordance with the IRS’s 60-day rollover rule.
Who Is Eligible for an In-Service 401(k) Rollover?
One of the complications with in-service rollovers is that not every 401(k) plan offers it. So, you will have to check with the custodian of your 401(k) to be sure that it’s an option.
Moreover, those who allow it may have varying rules regarding eligibility.
- The account holder must be at least 59 1/2 years old.
- The account must be at least two to five years old.
- The account holder must have reached retirement age.
- The account must have been terminated.
- The account holder must have been disabled.
In addition to the criteria for eligibility, employer guidelines differ whether an employee can resume a 401(k) after a rollover. While most employers allow it, they also require that the employee waits for some period before resuming.
Pros & Cons of an In-Service Rollover
There are some pros and cons to consider before following through with an in-service rollover.
- Wider investment options
- 401(k)s tend to have a lesser variety of investment options compared to IRAs. Investors who are looking to expand their portfolio can, therefore, benefit from IRAs. There are a special class of IRAs called self-directed IRAs (SDIRAs) that provide an even wider range of investment options.
- Possibility of lower fees
- Many 401(k) custodians charge excessive administration fees. Many people roll over into IRAs because of the possibility of paying lower administration fees.
- More control
- An IRA, as the name implies, gives more control to the account holder. For example, the account holder can choose their own administrator or custodian. With SDIRAs, this freedom is even more extensive.
- Possibility of higher fees
- Aside from lower administration fees, IRAs are not cheap. Some of the fees associated with IRAs include management fees, advisory fees, trading commissions, among others. Therefore, some IRAs — such as SDIRAs — can be as expensive as some 401(k)s.
- No option to take a loan
- 401(k) holders who are experiencing financial distress have an option to take a loan out of their plan (up to the lesser of $50,000 or 50% of the total funds in the plan). This is not available with IRAs.
- No option to start withdrawal at 55
- While qualified distributions from a 401(k) also begin at 59 1/2 years, there is a provision for early qualified distributions at 55 provided the plan owner has separated from service. This provision is not available for IRAs.
- Delay in resuming participation
- While many employers will allow in-service 401(k) rollovers, they might require employees to wait some time before resuming contributions to the 401(k).
Does an In-Service Rollover Work for Me?
As the pros and cons show, an in-service rollover can be both beneficial and detrimental.
The first step to deciding if it is best for you is to compare the fees of your current 401(k) with that of the IRA. If the IRA is not any less than the 401(k), then the rollover might not be that beneficial.
However, the extra investment options provided by IRAs might be so profitable that you are indifferent to fees. But you must be sure that you are not overestimating your expectations and that you have factored in the risk of those investment options into your evaluation.
If you don’t ever have to take a loan from your 401(k), the decision to roll over into an IRA might be more straightforward.
Weigh every pro and con and to determine which ones are more important to you. Once you have determined your priorities, it will be easier to decide if an in-service may work for you.
Other Options for Your 401(k)
In the place of in-service rollover 401(k), there are three other options for your 401(k).
- Keep your 401(k)
- You don’t need to rollover your 401(k) into an IRA. You can always decide to keep it until you change your job and transfer it into another 401(k). This is a good option if you believe the benefits of a 401(k) are superior to that of IRAs or if you have the financial capacity to keep both a 401(k) and an IRA.
- Roll over when you change jobs
- You can wait until you change your job before rolling over your 401(k) into an IRA. With this option, you don’t have to worry about the cons of in-service rollovers. Moreover, you can always start a new 401(k) with your new employer.
- Roll over into an annuity
- You can also do a 401(k) rollover into an annuity through a direct transfer or qualifying withdrawal. Annuities offer downside protection and can provide an additional source of income during retirement.
Speak to your financial advisor to weigh your options. They can help you decide whether to roll over your 401(k) into an IRA or if you should consider an alternative.
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2 Cited Research Articles
Annuity.org writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.
- Internal Revenue Service. (2022, June 16). Rollovers of Retirement Plan and IRA Distributions. Retrieved from Rollovers of Retirement Plan and IRA Distributions | Internal Revenue Service (irs.gov)
- Internal Revenue Service. (2022, July 28). Topic No. 413 Rollovers From Retirement Plans. Retrieved from Topic No. 413 Rollovers From Retirement Plans | Internal Revenue Service (irs.gov)
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