Can You Rollover a 401K While Still Employed? Here’s What You Need to Know

As an employee, you have the benefits of a 401k at your disposal when preparing for retirement, but sometimes you need a bit more flexibility. Your financial future is something you should take into consideration when you decide on your retirement accounts. This leaves many wondering if you can rollover a 401k while still employed.

To answer the question simply, yes, but this depends on your plan administrator. You can rollover your 401k to an IRA while still employed. Of course, this comes with some risks and rewards. Whatever you choose to do, be sure to consult with a financial advisor because the wrong decision can lead to unfortunate outcomes.

Eligibility for a 401k Rollover While Still Employed

While it is possible for you to rollover a 401k while still employed, you need to make sure you are eligible to do so. This depends on the plan you have and your plan administrator. Employer plans have restrictions imposed on a 401k plan so rollovers may not be possible for everyone. This is different from Thrift Savings Plans where all plans are eligible for a rollover to an IRA.

There are some 401k rollover rules while still employed that you must follow if you intend to do a 401k to an IRA rollover. For example, you must be at least 59 ½ years old to rollover a 401k while still employed. This would allow you to have penalty-free withdrawals.

Why Would I Want to Rollover a 401k to an IRA While Still Employed?

While having a 401k has a lot of benefits, there are some drawbacks that might make you consider if you can rollover a 401k while still employed.

1. Expand Your Investment Options

While a 401k plan is a great investment, it doesn’t give 401k account holders the flexibility and diversification they might want. You can get these things easily with an IRA because you are in control of your retirement account. With a 401k plan, you are stuck with the limitations of your plan and plan administrator.

2. Get Outside Financial Advice for Your Retirement Planning

A 401k is not only limited in terms of investment options, but also in the kind of advice you follow. If you want more flexibility or insight into how to invest wisely to make the most out of your savings, you can’t get that with your 401k plan. Financial advisors won’t be able to give you the custom advice you might want or need due to ERISA limitations.

3. Flexibility with Beneficiaries

With some IRAs, you have the flexibility to name multiple or contingent beneficiaries or even a trust as the beneficiary. You may also be able to impose restrictions on how those beneficiaries receive their distributions. These options provide more control and flexibility over your retirement funds and are worth considering when making this important decision. These options aren’t typically available with a 401k plan.

What Are the Disadvantages of Rollover a 401k While Still Employed?

Just because you technically can do something that doesn’t means that you should do it. As with any major financial decision you make, a rollover from a 401k to an IRA while still employed has its disadvantages. A 401k plan has lots of advantages as an employer-backed plan and you can be giving up quite a lot:

1. Giving Up Federal Protections

Having money in a 401k can be a great way to save for retirement and protect yourself from potential creditors. Did you know that by federal law, money held in a 401k is protected from almost all types of creditor judgments? This means that if you ever find yourself facing financial difficulties, you can rest assured knowing your savings are secure and protected.

Unfortunately, traditional IRAs and other retirement accounts are not protected from creditors under federal law. Instead, each state has its own set of laws that specify the extent to which IRAs are protected from creditors in their jurisdiction, including bankruptcy.

2. Losing Buying Power

Your 401k might lack diversity for investment options, but it has significant buying power compared to IRAs. This is due to their larger investment amounts because they are employer-backed—you have something like a corporate discount which gives you access to more competitive fees, unlocking more of their money for retirement savings.

3. Giving Up Penalty-Free Access to Funds Before 59

One of the biggest drawbacks is that transferring your 401k into an IRA can limit your access to funds from this account until you turn 59½. This means that if you need to withdraw money from this account before then, you may be subject to a hefty penalty.

Employers set the rules about how many times people in this age group can withdraw funds, but this privilege is lost once you roll the 401k into an IRA. After that, you'll need to wait until age 59 ½ to access your retirement funds without facing early withdrawal penalties. This is one of the main things to consider before you rollover a 401k while still employed, especially if you might plan to retire before you are 55 years old.

4. Losing Any Loan Opportunities

For all the potential drawbacks you might face with a 401k retirement plan, this is one reason to stay with your current plan. A 401k plan may allow you to take out loans on your account while you are still employed.

This can be a great security blanket if you need a loan for emergencies. You will only need to pay outstanding loan balances when you leave your place of employment. An IRA doesn’t give you this opportunity.

Should I Rollover a 401k While Still Employed?

With financial advice at your fingertips, everyone can be tempted to turn to the latest fad to get the most out of their savings. However, if you are turning to a 401k rollover while still employed, be careful.

Whatever your unique financial needs are, it’s important to understand the rules and potential implications of rolling over your 401k. Always consult with a financial planner when considering a 401k rollover while still employed.

Call the pros at Asset Preservation Wealth & Tax

Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.

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