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 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.

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.

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.

There are some pros and cons to consider before following through with an in-service rollover.

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.

In the place of in-service rollover 401(k), there are three other options for your 401(k).

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.