Anyone can roll over a 401(k) to an IRA or to a new employer's 401(k) plan when leaving a job. Depending on your plan's policies, you might be able to make the rollover while you're still with the company. Unlike a post-job rollover, your plan doesn't have to allow in-service rollovers, but many companies do. However, there are usually significant restrictions.
Rolling over your 401k while still working can be done fairly easy if you still work for an employer under certain conditions. Be sure to speak with your 401k respresentative as not all processes are the same.
401(k) Portability Benefit
In years past, it was commonplace that many employees retired from the same company where they began working right out of high school or college. But in today's more transient workplace, people often change jobs. If taxpayers did not have the option of rolling over their 401(k) funds from a former job to a new job, the 401(k) program may not be as useful as it has become. But because 401(k) funds are "portable," this means they can move from plan to plan.
In-Service Rollover Qualifications
Most 401(k) plans allow you to take the money out once you turn 59 1/2. This includes both rollovers and making withdrawals. If you're under the cutoff age, only a minority of companies let you do the same, and the rules are more confining.
These so-called "in-service" rollovers have significant restrictions. If you fail to observe the restrictions, your attempted rollover may be treated as a distribution.
Penalty for Not Rolling Over
Although it may be tempting to cash out your 401(k) (or take a partial cash-out sum) when you change jobs instead of rolling the funds into your new employer's plan, the penalties can be substantial. Distributions from 401(k) plans before age 59 1/2 result in taxation of the amount withdrawn, at ordinary income rates. You may also face a 10 percent early withdrawal penalty unless you die, become disabled, or the plan terminates.
Even if you're allowed to make an in-service rollover, you can never rollover your pre-tax 401(k) contributions. Your rollover amount is limited to money you've already rolled over from previous 401(k) accounts, along with employer contributions, earnings and any after-tax contributions.
Read your plan documents and find out if you can make an in-service rollover. If you can, contact the plan manager and ask to transfer money to the traditional or Roth IRA of your choice. If it's a Roth rollover, you'll pay tax on the transfer, but your withdrawals down the road will be tax-free. You can withdraw the money and make the transfer yourself, but if you don't complete it within 60 days, you'll face hefty tax penalties.
Pros and Cons
Rolling over a 401(k) can be a good move if you want different investment options from your company plan, or if the plan fees are too high. Putting assets into a Roth also sets you up for tax-free income later in life. If the 401(k) fees are low, you might be better off leaving the money where it is. The same is true if the assets are performing well and you're not sure you can invest them more profitably.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.