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As an employee, you have the benefits of a 401k at your disposal when preparing for retirement. But sometimes you need 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, consult 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.
You must follow some 401k rollover rules while still employed 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?
A 401k has a lot of benefits. But there are some drawbacks that might make you consider if you can rollover a 401k while still employed.
1. Expand Your Investment Options
Generally, 401k plans are great investments. But it doesn’t give you the flexibility or variety you might want. You can get these things easily with an IRA because you are in control of your retirement account. A 401k plan limits you to the rules set by your plan and its administrator.
2. Get Outside Financial Advice for Your Retirement Planning
A 401k is not only limited in investment options, but also in the kind of advice you follow. You won’t have flexibility or guidance you need to invest smart and grow your savings. Financial advisors won’t be able to give you the custom advice because of ERISA limitations.
3. Flexibility with Beneficiaries
Some IRAs let you name more than one beneficiary. You can also choose a backup or even a trust. You may also be able to impose restrictions on how those beneficiaries receive their distributions.
These options give you more control and flexibility with your retirement money. They’re worth considering when you decide what to do and aren’t typically available with a 401k plan.
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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. Like any major financial decision, a rollover from a 401k to an IRA while still employed has 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 in a 401k has protection from almost all types of creditor judgments? If you face financial troubles, your savings stay safe and it has creditor protection.
Unfortunately, traditional IRAs and other retirement accounts don’t have creditor protection under federal law. Each state has its own laws about how much IRA money is safe from creditors, including during bankruptcy.
2. Losing Buying Power
Your 401k might lack diversity for investment options, but it has significant buying power compared to IRAs. This because of their larger investment amounts because they are employer-backed. You have something like a corporate discount. This 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 drawback 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 must withdraw money from this account before, you may be subject to a hefty penalty.
Employers decide how often you can withdraw funds at this age. Employers lose this privilege 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. Consider this 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 an employee.
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.
What About Roth Accounts?
Many people also wonder if they can rollover a 401k to Roth IRA while still employed. The answer is yes, in some cases. If your employer offers a Roth 401k, and you want to move it, you might be able to do a rollover Roth 401k to Roth IRA while still employed.
But you need to be mindful of the tax implications, since Roth rollovers may trigger a tax bill. Always speak to a tax professional before making this move. This option lets you keep the benefits of Roth accounts, like tax-free growth and withdrawals, while gaining more control over your investment choices.
Should I Rollover a 401k While Still Employed?
Easy access to financial advice can tempt anyone to chase the latest trend to grow their savings. However, if you are turning to a 401k to IRA rollover while still employed, be careful.
Whatever your unique financial needs are, you should 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.
The commentary on this blog reflects the personal opinions, viewpoints and analyses of the author, Stewart Willis, providing such comments, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment, legal or tax advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Personal investment advice can only be rendered after the engagement of Foundations for services, execution of required documentation, including receipt of required disclosures. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Any statistical data or information obtained from or prepared by third party sources that Foundations deems reliable but in no way does Foundations guarantee the accuracy or completeness. Investments in securities involve the risk of loss. Any past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Foundations and its advisors are properly licensed or exempted. For more information, please go to https://adviserinfo.sec.gov and search by our firm name or by our CRD # 175083.
