In-Service 401(k) Rollover

What Is an In-Service 401(k) Rollover?

An in-service 401(k) rollover is the transfer of the assets in your existing 401(k) plan to an IRA, while you are still at your current job. Most rollovers happen when you change jobs, but an in-service rollover is allowed while you still work for the employer sponsoring your 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).

Thomas J. Brock, CFA®, CPAInvestment, Corporate Finance and Accounting Expert

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.

How Does an In-Service 401(k) Rollover Work?

An in-service 401(k) rollover 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.

Direct Rollover

With a direct rollover, the money in your 401(k) moves directly into an IRA. This avoids tax withholding. 

You never touch the money. It’s transferred from one account to another by your plan’s administrator. Direct rollovers protect your retirement savings from taxes and penalties. 

Indirect Rollover

With an indirect rollover, you are given the money from your 401(k) and deposit them into a personal account. You then have 60 days to deposit all of the funds into an IRA. If you don’t, then you have to pay taxes and penalties.

An indirect rollover can cause you to owe income taxes and excess contribution taxes. You may also be subject to a withdrawal penalty.

Who Is Eligible for an In-Service 401(k) Rollover?

One of the complications with in-service 401(k) 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 in-service rollover rules regarding eligibility.

Some common eligibility requirements include:

• The account holder must be at least 59½ 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 eligibility criteria, employer guidelines differ on 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 401(k) rollover.

Pros of a 401(k) 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 is a special class of IRAs called self-directed IRAs (SDIRAs) that provide an even wider range of investment options.

More Distribution Options
If you have a Roth IRA, there is no set age at which you are required to make minimum distributions. If you have a 401(k) or Traditional IRA, then you have to make the required minimum distributions by April 1 of the year you reach a certain age. It’s 72 — if you turned 72 before 2022 — and 73 if you turned 72 in 2023.

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.

Cons of a 401(k) In-Service Rollover

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 and 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 the option to take a loan out of their plan (up to the lesser of either $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 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 you are not overestimating your expectations and that you have factored in the risk of those investment options into your evaluation.

In addition, 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 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.

Tips for Rolling Over Your 401(k)

You need to be aware of any taxes, fees and penalties that may be involved with any rollover. This means talking to your current plan administrator and the brokerage firm where you open your IRA.

Understanding the process, potential costs and other factors involved in the in-service 401(k) rollover can make the process much smoother while optimizing your retirement savings.

Tips for Rolling Over Your 401(k)

• Talk with a financial advisor. This can help you get the most out of your retirement savings as you make the rollover. It can also help you understand 401(k) in-service rollover rules to prepare you for later steps in your rollover planning.
• Choose the IRA brokerage carefully. Understand all fees associated with the rollover. Shop around for a firm that charges low fees — some require no fees. Look for the best deal.
• Check on investment flexibility. IRAs typically have a wider range of investment options. Look for one that suits your needs.
• Ask the brokerage about access to your money — some things, such as a first home purchase, childbirth or college expenses may be allowed.
• Talk with both your plan administrator at your current job and the brokerage about how the rollover process works. Be aware of fees and penalties. Understand whether there will be a direct rollover or whether you’ll receive a check that you have to deposit — an indirect rollover. 
• If you have an indirect rollover, make sure you deposit the money in the IRA within 60 days to avoid taxes, penalties and other fees.
• Once the funds have been deposited into your IRA, set up your investments right away and customize them to your risk tolerance, age and retirement goals.

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 roll over 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.

Rollover 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.

Rollover 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.

Frequently Asked Questions

Editor Malori Malone contributed to this article.