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Can I Convert a 401(k) to an IRA Without Leaving My Job?

By Motley Fool Staff – Updated Oct 16, 2016 at 4:43PM

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The limitations on retirement plans can prevent you from doing what you want.

401(k) plans can be an effective way that workers can save toward their retirement. However, many employees don't like the investment choices that their employers' 401(k) plans allow them to make, and they would prefer to move money out of their 401(k) plan accounts into an IRA in their own name. Most employer plans don't allow employees to transfer money from a 401(k) account to an IRA while they're still working, but a few do offer what are known as in-service rollovers that make that option available to a limited number of workers.

The general rule: No rollover while working
Workers generally aren't allowed to take money out of their 401(k) plan accounts while they're still working. Limited exceptions apply for hardship withdrawals, but workers aren't allowed to take those withdrawals and roll them over into an IRA. Similarly, money ta ken out of a 401(k) for uses like a first-time home purchase or educational expenses might qualify for exceptions to the 10% penalty for early withdrawals, but they don't open the door to IRA rollovers.

If you do take a 401(k) withdrawal and deposit the proceeds into an IRA, the IRS will treat it as a taxable distribution followed by an IRA contribution. The distribution will be taxable and subject to an early withdrawal penalty if appropriate, and the contribution will be subject to normal IRA limitations. If you're not allowed to make an IRA contribution in that amount, additional penalties will apply.

Exceptions for in-service rollovers
Some 401(k) plans allow participants to do in-service rollovers. This provision makes it possible to move money from a 401(k) to an IRA, but there are limitations.

For instance, some plans will require that a participant be at least 59 1/2 before it will allow an in-service rollover. In that case, those who are under 59 1/2 will suffer the same tax consequences described above if they try to accomplish the same thing that those 59 1/2 and over can do in a tax-free rollover. Other plans include a minimum length of service with the employer that typically ranges from two to five years.

The law governing 401(k) plans also limits withdrawals. Rollovers can include employer contributions from matching and profit-sharing contributions, as well as after-tax contributions that the employee makes. The more typical pretax contributions that nearly all workers make are only eligible for rollover once the employee reaches age 59 1/2.

As much as you might want to get money out of a bad 401(k) plan as soon as possible, the only way to do it in all cases is to quit your job. The in-service withdrawal option is rarely available and doesn't offer a full solution to most workers in any case.

If you've managed to roll over your money into an IRA or you have more questions about how these retirement accounts work, join us at the IRA Center. We'll cover the basics and help you find the best IRA fit for your investing needs.

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