In almost all cases, you are not allowed to roll over the 401(k) plan from your current job unless the plan specifically allows for “in-service withdrawals.” However, It is almost always acceptable to roll over 401(k) plan(s) from a company you no longer work for.
How do 401(k)s usually work when I want to do a roll over to my IRA?
Usually, you cannot move your 401(k) assets until you are terminated, meaning you have resigned or you have been terminated from the job.
In rare cases, 401(k)plans may allow for in-service withdrawals, which allows current employees to easily roll over their 401(k) plan assets over to an IRA or Solo 401(k) to invest without having to be terminated or separated from employment.
If there are in-service withdrawals, you can roll over your own personal contributions, but some of the employer match or profit-sharing money may have not yet been vested according to the vesting schedule. If the employer match money has not yet been vested, you cannot withdraw assets from the plan, even with in-service withdrawals activated by the plan sponsor. If you leave the company, your continued vesting in the employer match or profit sharing will cease to continue, similarly to how a stock vests in an employee stock option program.
Why are in-service withdrawals not available with virtually all 401(k) plans?
401(k) recordkeepers often make money on a formula tied to the overall amount of assets within the plansponsor’s 401(k) plan. Therefore, there is little incentive to allow currently active employees to move 401(k) and vested employer match and profit-sharing amount to leave the plan prior to a change in active employment status. In addition, business owners can lower fees for the administration of a 401(k) plan based on the overall size of assets contained within their 401(k). In fact, disallowing in-service withdrawals is often a default 401(k) plan option that is pre-selected for the vast majority of retirement plans in the United States.
How do I ask for this?
If you want to check whether or not your plan allows for it, you should ask your Human Resources department or your company’s designated plan administrator if your current employer plan allows for in-service withdrawals.
Separately, employees may elect to do an early distribution from their current employer's 401(k) plan. However, these are generally seen as a very bad option for long-term retirement savings and tax planning since any funds subject to an early distribuiton will receive a 10% early withdrawal penalty for individuals under age 59 ½, as well as subjecting the distributed funds to taxation in the current year. In this case, a rollover to an IRA will keep you from incurring any tax penalties and preserve the tax deferral of your assets.
If you are asking HR or an employee who manages employee benefits...
I would like to see if in-service withdrawals are allowed in our 401(k) plan. I am interested in doing a roll over of some or all of my current vested 401(k) plan balance to my IRA.
If you are talking directly with your 401(k) provider...
I would like to see if in-service withdrawals are possible to allow current employees to roll over their dollars to their own IRA(s). Is the in-service withdrawal feature enabled in our current plan adoption agreement and, if not, are there steps that can be taken to make this request at the plan sponsor levelto amend the plan document?
My company plan won’t let me do an in-service rollover... is there anything else I can do?
Due to the COVID 19 Pandemic and the Congressional Stimulus bill and CARES Act, you might be able to take dollars out of a corporate 401(k) and then place them back inside an IRA. Keep in mind if those dollars are NOT returned to an IRA or 401(k) within three years, you can see tax consequences for all those dollars in distribution. Always make this decision carefully and consider talking to a tax professional to consider your options.
You can read more here.
Will Rocket Dollar’s ability to invest in alternatives come to the corporate 401(k) industry?
We can help companies and small businesses with setting up a SEP-IRA, where each employee sets up their own SEP-IRA with the company of their choosing.
For example, five employees could open up SEP-IRAs at Rocket Dollar, while the other fifteen employees can open up their SEP-IRAs at other custodians that may be limited to just traditional investments such as stocks and bonds.
With corporate 401(k) plans, the company or plan sponsor, along with the CEO or other individual, acts as the trustee of the plan and is sometimes even designated as the plan fiduciary. Although the CEO or other individuals may be knowledgeable about alternative investments and advanced investment concepts in general, fiduciaries and plan trustees have an obligation to take care of the investment health of the plan and the employees participating in it. As the IRS lays out, fiduciaries must...
- Acting solely in the interest of the participants and their beneficiaries;
- Acting for the exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries and defraying reasonable expenses of the plan;
- Carrying out duties with the care, skill, prudence, and diligence of a prudent person familiar with the matters;
- following the plan documents; and
- diversifying plan investments.
For example, there may be a case to be made for a plan sponsor to enable the in-service withdrawal feature, discussed earlier, to let a current employee roll the vested portion of their current employer 401(k) plan out to an IRA if they feel comfortable managing their own investments.
However, as a counter-example, a plan sponsor could run afoul of their fiduciary duty to properly manage their 401(k) plan’s investments if they put 40 alternative or private investment choices as the only options since this would not be appropriate for the majority of plan participants.
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