Many investors only think about rolling over their 401(k) savings into an IRA when they change jobs. But switching employers isn't the only time you can initiate a transfer. In fact, many 401(k) plans allow participants to roll over their current 401(k) funds into an IRA, even while they are still employed by the plan sponsor. 

Also known as an in-service distribution, this option comes with both benefits and tradeoffs for the investor. Your Ameriprise financial advisor can help you weigh the pros and cons to determine whether this transfer of funds makes sense for you. Here’s an overview of why you may — or may not — want to roll over your current 401(k), while still employed. 

What is an in-service distribution? 

An in-service distribution allows you to roll over funds from your 401(k) to an IRA while you’re still employed — without incurring taxes or penalties. Sometimes called non-hardship distributions, such moves can provide more options to manage your retirement savings before you retire — while you continue to work and contribute to an employer-sponsored plan.  

However, not all employer-sponsored retirement plans allow in-service distributions, so it’s important to understand your plan rules. You can find out if your 401(k) offers this option by reading the plan summary description, which your employer or plan administrator can provide to you. 

Why you may want to roll over your 401(k) while you’re still with your employer 

Sometimes it makes sense to roll over your 401(k) assets while you continue to work and make further contributions to your company plan. Here are the key benefits of an in-service distribution: 

1. More investment offerings: 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. In an IRA, you may have more choices with annuities, structured products and certificates.   

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), 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. A 10% penalty applies if you are younger than 59½ when you take a distribution, however. 401(k) distributions are limited by the plan rules and are subject to mandatory 20% withholding.  

5. More legacy planning options: IRAs often allow you to designate beneficiaries in several ways, such as naming multiple or contingent beneficiaries or naming a trust as beneficiary. IRAs also allow your beneficiaries to extend tax deferrals by taking distributions over the maximum term allowed by law. (Employer plans may require a beneficiary to take distributions more quickly.) 

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

In other situations, it may make sense to keep your 401(k) funds with the employer-sponsored plan, rather than roll them into an IRA via an in-service distribution. Here’s why: 

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. Creditor protection: Employer plans such as a 401(k) have broad federal creditor protection. And while IRAs also have some federal bankruptcy protection, other creditor protection is determined by state laws.  

3. Earlier retirement age: Most 401(k) plans allow penalty-free withdrawals after age 55 for early retirees, as long as you separate from service with your employer. With an IRA, you must wait until age 59½ to avoid paying a 10% penalty. 

4. Increased fees: IRA investors may pay more fees than they would in employer-sponsored plans because they offer a wider range of investment offerings. Further, employer plan participants are not charged certain fees that apply to an IRA, and investment expenses may also be relatively low due to institutional pricing.  

5. Loan availability: Your 401(k) may permit you to take a loan from the account, but this is typically only for active employees. And you may have to pay back in full any outstanding loan balances when you leave the company. You cannot take loans from IRAs. 

Let’s evaluate your options 

Your Ameriprise financial advisor can help determine if it makes sense to roll over your current employer-sponsored plan into an IRA via an in-service distribution.