Should You Rollover Your Retirement Plan While You Are Still Employed?

Should You Rollover Your Retirement Plan While You Are Still Employed?-Financial Symmetry,Inc.

Did you know you may be able to take your 401(k), 403(b), or 457 plan and roll it into another type of retirement account while you are still working? Keep reading to find out the difference between regular 401(k) distributions and in-service withdrawals, and if this is right for your financial situation.


What happens when I take a distribution from my 401(k)?

Distributions from 401(k) plans and most other employer-sponsored retirement plans are taxed as ordinary income, and if you take one before age 59½, a 10% federal income tax penalty commonly applies. With few exceptions, 20% of the withdrawn amount is withheld for tax purposes.  Taxes and penalties do not apply for Roth conversions and rollers when the distribution would be put back into a retirement account.

Generally, distributions from retirement accounts must begin once you reach age 72. The money distributed to you is taxed as ordinary income, and there are no penalties. You can read more about required minimum distributions here.


What is an in-service withdrawal?

You may be able to take a distribution from your qualified, employer-sponsored retirement plan while still working. This process is known as an in-service withdrawal. An in-service withdrawal means arranging a direct rollover of these assets to an IRA in order to avoid both the 10% penalty and the 20% tax withholding in the process. It’s important to note that this option is only available if allowed by your employer’s plan rules.

The criteria for making in-service non-hardship withdrawals can vary. Some workplace retirement plans simply prohibit them. Others permit them when you have been on the job for at least five years, when assets in your plan have accumulated for at least two years, or you are 100% vested in your account.

You can either review your plan documents or call the custodian where your retirement plan is held to determine if an in-service withdrawal is allowed.

If you decide to move forward with an in-service withdrawal, it’s important to understand the unexpected roadblocks surrounding a 401(k) rollover in order to make the best decisions with your money. Listen to this podcast episode to hear steps of how to properly rollover a 401(k) quickly and efficiently.


Is an in-service withdrawal right for you?

If you have limited investment options, high 401(k) fees, or are looking for better control of customizing your beneficiary designations, an in-service withdrawal may be right for you. An in-service withdrawal may also be a unique way for you to expand your tax strategies, such as allowing you to move some of your pre-tax funds to an IRA that you can use for Roth IRA conversions. Contact one of our financial advisors to see if an in-service withdrawal is best for your financial situation. You can also download our account rollover process overview here.


A portion of this material was prepared by MarketingPro, Inc

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