Can I Roll Over My 401(k) to a Roth IRA While Still Employed?

A 401(k) rollover is a common choice made by several employees each year. Many people prefer transferring their 401(k) to a new job. In this case, they move their funds from the previous employer’s 401(k) to the new employer’s 401(k) plan. If the new employer does not offer a 401(k) or if the new plan does not provide the same benefits, employees may also choose to roll over the 401(k) to a Roth IRA(Individual Retirement Account). This can help individuals continue with their retirement savings without a halt. Another common reason for a rollover is retirement. Many people move their funds to a Roth IRA during retirement after quitting their jobs. However, a job change, job loss, or retirement is not the only time a 401(k) can be rolled over to a Roth IRA. You can also use this option while working with the same employer. 

A financial advisor can help you understand the intricacies of a 401(k) rollover and how to initiate the process in such a situation. This article also discusses a 401(k) rollover and can help you understand how to roll over a 401(k) to a Roth IRA without quitting your job

What is a 401(k) rollover?

A 401(k) rollover involves transferring your retirement savings from a previous employer’s 401(k) plan to a new retirement account. This new account can be another 401(k) plan with a new employer or a Roth IRA. There can be several reasons for a rollover, such as consolidating your retirement savings into one account, gaining greater control over the investments, exposure to better plan features, enjoying tax benefits, or simply keeping your account where you go. In most cases, people find it hard to manage their 401ks after they quit their jobs. Moving the money to a new account allows you to choose your own investments, access better plan options, and avoid any administrative fees associated with the old account.

There are some rules associated with a 401(k) rollover along with tax implications, especially if you are rolling over funds from a traditional 401(k) to a Roth IRA. In this case, you will have to pay the tax due at the time of the transfer. It is recommended to consult with a financial advisor before making any decisions regarding retirement account rollovers.

Can you roll over your 401(k) while still employed?

Yes, you can roll over your 401(k) while working. This can be done through an in-service rollover. This type of rollover is also sometimes referred to as an in-plan rollover or a partial rollover. However, most companies call it an in-service rollover because it can only be accessed while you are still working for the employer that sponsors the retirement plan.

An in-service rollover is similar to a traditional rollover. However, it can be used when you are still employed by your employer, while a traditional rollover is made after you quit or retire. A select few companies offer in-service rollovers. So it is advised to first check with your employer whether your company permits it or not. 

The greatest benefit of an in-service rollover is that it allows you to diversify your retirement savings and potentially access a broader range of investment options than those available within your employer-sponsored retirement plan. It can also provide greater flexibility in managing retirement savings and reduce the risk of losing all retirement savings due to unforeseen circumstances, such as a job loss or the employer’s bankruptcy.

It is important to note that there are some restrictions and fees associated with an in-service rollover. These can differ for different types of plans and companies. For instance, in most cases, you should be over 55 or 59.5 years old to qualify for the rollover. Some companies may only allow you to make the rollover if you have contributed to the plan for at least five years.

Should I roll over my 401k?

In order to decide this, it is essential to know the pros and cons of a rollover. An in-service rollover can benefit some people in certain situations and may not be advisable for others. The right decision can depend from person to person and must be made after a thorough evaluation of the following advantages and disadvantages:

Pros of a 401k rollover

1. It lets you diversify your investments

When you roll over the 401(k) to a Roth IRA, you may get more investment options than those provided by your employer’s plan. This allows you to diversify your portfolio and potentially increase your returns. While a 401(k) is an excellent retirement savings vehicle and is used by several investors across the country, its success or usefulness largely depends on the kind of investment options it offers. If you are not satisfied with your plan’s investment options, you can benefit from rolling over to a Roth IRA. 

2. It offers greater control over your retirement investments

A Roth IRA may offer you more control over your retirement savings. You can choose your own investments, adjust your asset allocation, and make changes to your account at any time. While a 401(k) also offers these features, it is primarily governed by the plan administrator/ employer, and you lack control. Moreover, a Roth IRA is not dependent on an employer. You can change multiple jobs and never have to worry about what happens to your IRA. With a 401k, every time you change your job, you will be faced with the question of what happens to your account now. For people who switch jobs frequently, this can be a cumbersome process. 

3. It helps you to save up on fees

Many 401(k) plans charge high fees that eat into your returns over time. Rolling over some of your funds to a low-cost Roth IRA can save you money in the long run. If you think your 401(k) plan charges too much, you can look for relatively more affordable IRAs. 

4. It enables you to save taxes in retirement

Evidently, the most significant benefit of a traditional Roth rollover is the tax break in retirement. A Roth account is not taxed in retirement and allows you to make tax-free withdrawals. If you wish to enjoy this benefit, consider an in-service rollover. A Roth IRA also does not have Required Mandatory Distributions (RMDs) from age 73.



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Cons of a 401k rollover

1. Limited IRA contributions can impact your final retirement corpus

A 401(k) allows you to contribute up to $22,500 if you are under 50 in 2023. If you are 50 or older, you can make a catch-up contribution of $7,500 and contribute up to $30,000 in total. On the other hand, a Roth IRA’s contributions are a lot less. As of 2023, you can contribute up to $6,500if you are under 50. If you are 50 or older, you can make a catch-up contribution of $1,000 and contribute up to $7,500 in total. A 401(k) can help you save four times the amount of a Roth IRA and considerably speed up your retirement savings. Even with better investment options in a Roth IRA, you may be unable to make up for this difference. 

2. Lack of company stocks and an employer match

Two of the greatest benefits of a 401(k) are employer matches and company stocks. Most companies offer their stock to employees in 401(k) plans. This gives you a chance to invest in the company’s growth. Since you work for the company, you may have better information about the business and can make better investment decisions about the stock’s potential. The employer match is another benefit of a 401k. You can contribute up to $66,000 and $73,500 with catch-up contributions to a 401(k) with an employer match in 2023. If the employer matches your contribution, you earn and save more money. These options are not available in a Roth IRA. 

3. You will owe taxes on the rollover

If you move money from a traditional 401(k) to a traditional IRA, you will not owe taxes. However, if you transfer money from a traditional 401(k) to a Roth IRA, you will owe taxes on the amount you roll over. This is because a traditional 401(k) has RMDs from the age of 73, which are then taxed as per your income tax slab for the year. However, a Roth IRA is tax-free in retirement. So, you need to clear your tax dues when you make a rollover. 

4. You lose out on other employer benefits 

Some employers offer 401(k) plan participants additional benefits, such as low-cost loans. These can be helpful in an emergency. If you roll over your funds to a Roth IRA, you will lose access to these benefits. A Roth IRA does not provide such facilities. 

Can I cash out my 401(k) while still employed?

In general, you cannot cash out your 401(k) account while still employed with the company that sponsors the plan. This is because 401(k) plans are designed to help you save for retirement, and there are tax penalties for withdrawing money from your account before the age of 59.5 years. However, some 401(k) plans may offer loans or hardship withdrawals that allow you to access your account balance before retirement. For instance, during the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act allowed 401(k) investors to make withdrawals of up to $100,000 to ease financial stress caused by the lockdowns.

Other than this, you can cash out 401(k) in premature withdrawals before the age of 59.5 in some special circumstances allowed by the Internal Revenue Service (IRS), such as:

  • As a first-time homebuyer, you are eligible to withdraw up to a maximum of $10,000 to finance your home purchase expenses.
  • You can use the funds if you are unemployed and require assistance paying your health insurance premiums.
  • In case you have been diagnosed with a permanent and total disability, you can withdraw funds from your account.
  • You can make a withdrawal to pay for approved higher education expenses.

Can you have an IRA and a 401(k) at the same time?

Yes, you can keep both accounts at the same time. Many people do this to benefit from both accounts. 401ks and IRAs offer different benefits and advantages, so having them can be a great way to diversify your retirement savings, maximize your tax-advantaged contributions, and enjoy more flexibility and control over your retirement plan.

A traditional 401(k) is an employer-sponsored retirement plan that allows you to contribute a portion of your pre-tax income into the account. Your employer may also offer a matching contribution, boosting your savings. On the other hand, a Roth IRA is a retirement account you can set up on your own, independent of your employer. You can open it with a credit union, a bank, a broker, or an insurance company. The contributions are tax-deductible and qualified withdrawals are tax-free.

However, since both accounts have different rules for contributions, withdrawals, and taxes, it is essential to understand the differences and advantages of each before adding them to your portfolio. 

To conclude

An in-service rollover can be a good option if you wish to roll over your 401(k) while still employed with the same employer. However, it does have certain limitations and rules. It is recommended to consult with a financial advisor to understand the options and potential implications of an in-service rollover. It is also advised to talk to your plan administrator and carefully consider the potential long-term impact on your retirement savings before taking any action. Different companies may have different rules about eligibility. So, make sure you research well before making a decision. Moreover, pay attention to the tax liabilities, which can be an immediate expense. 

Use the free advisor match service to find a financial advisor who can help you understand how to transfer 401(k) to a new job, within the same job, or make premature withdrawals based on your needs. All you have to do is answer a few simple questions based on your financial needs, and the match tool will help connect you with 1-3 advisors best suited to meet your financial requirements.

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