Can you roll over a 401(k) to an IRA while still employed?

A lot of people only think about rolling over their 401(k) savings into an IRA when they change jobs. For many people, that is an ideal time to shift funds because they can consolidate several retirement accounts from previous employers in one place and potentially take advantage of more investment options. Though there could be reasons not to do so as well.

When leaving an employer, there are typically four 401(k) options:

1. Leave the money in your former employer's plan, if permitted
2. Roll over the assets to the new employer's plan if one exists and rollovers are permitted
3. Roll over to an IRA
4. Cash out the account value

But, can you roll over a 401(k) while still employed with the same company? 

The short answer is yes – you can roll over your 401(k) while still employed at the same place. Leaving an employer isn't the only time you can move your 401(k) savings. Sometimes it makes sense to roll over your 401(k) assets while you continue to work and make further contributions to your company plan. These rollovers may help you more effectively manage your retirement savings and diversify your investments.

It is important to really weigh the pros and cons when considering this. But first, do some checking to see if you're eligible. Not every plan allows you to transfer your 401(k) to an IRA while still employed.

4 reasons why you may want to roll over your 401(k) to an IRA while you’re still with your employer

1. Diversification. Investment options in your 401(k) can be limited and are selected by the plan sponsor. Rolling your funds over into an IRA can often broaden your choice of investments. More choices can mean more diversification in your retirement portfolio and the opportunity to invest in a wider range of asset classes including individual stocks and bonds, managed accounts, REITs and alternatives.
2. Downside protection.  With some 401(k) plans, you may not have investment choices that allow you to lock in the gains that you have made over the years. Protecting your retirement plan against an unexpected market downturn becomes more important as you approach retirement age. You may have more choices with annuities, structured products and certificates in an IRA.
3. Ownership control. You are the owner and have access rights with an IRA. The assets in your IRA are also not subject to blackout periods. With a 401(k) plan, the qualified plan trustee owns the plan, and assets may be subject to blackout periods in which participant transactions, like withdrawals or investment changes, could be limited.
4. Distribution options. With an IRA, you have the flexibility to take distributions when you would like and can choose the amount of withholding. 401(k) plan distributions are limited by the plan rules and are subject to mandatory 20% withholding.

4 reasons you may not want roll over your 401(k) while you’re still employed

1. Temporary ban on contributions. Some plan sponsors impose a temporary ban on further 401(k) contributions for employees who withdraw funds before leaving the company. If this applies to your plan, you'll want to determine if the gap in contributions will significantly impact your retirement savings.
2. Early retirement. Most 401(k)s allow penalty-free withdrawals after age 55 for early retirees. With an IRA, you must wait until 59½ to avoid paying a 10% penalty.
3. Increased fees. IRA investors may pay more fees than they would in employer-sponsored plans. One reason: The range of more sophisticated investment options you may choose can be more expensive than 401(k) investments. Your Ameriprise financial advisor can help identify what extra cost a rollover may incur and if the benefits of the rollover justify those additional costs.
4. Loan availability. Your 401(k) may permit you to take out a loan from the account, but this is typically only for active employees. And you may have to pay in full any outstanding loan balances when you leave the company. You cannot take loans from IRAs.

How we can help

With all the different factors at play for individuals, you may still be asking yourself, “can I roll a 401(k) into an IRA while still employed?” Your Ameriprise financial advisor can help you determine if such a transfer fits with your retirement savings plan. Your advisor can also help determine what investments are appropriate for you if you do decide to roll over your funds.