Pros and cons of rolling over your 401(k) while still employed

Key Points

  • Most people roll over 401(k) savings into an IRA when they change jobs or retire. But, the majority of plans allow employees to roll over funds while they are still working.
  • A 401(k) rollover into an IRA may offer the opportunity for more control, more diversified investments and flexible beneficiary options.
  • This strategy may not work well for everyone. Work with your advisor to weigh the costs and benefits.

Most 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 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, 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 401(k) plan allows you to roll over your 401(k) while you are still working.

Reasons you may want to roll over now

  • 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 annuities.
  • Beneficiary flexibility. With some IRAs, you may be able to name multiple and contingent beneficiaries or name a trust as the beneficiary. Other IRAs may allow you to impose restrictions on beneficiaries. These options aren't usually available with 401(k)s. But, keep in mind, not all IRA custodians have the same rules about beneficiaries so be sure to check carefully.
  • 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 assets and assets may be subject to blackout periods in which account access is limited.
  • Distribution options. If your IRA is set up as a Roth IRA, there is not a set age when the owner is required to take minimum distributions. With 401(k) plans and traditional IRAs, the owner will have to take required minimum distributions by April 1 of the year after they turn age 70 ½.

Reasons you may want to wait

  • 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. You'll want to determine if the gap in contributions will significantly impact your retirement savings.
  • Early retirement. Most 401(k)s allow penalty-free withdrawals after age 55 for early retirees. With an IRA, you must wait until 59 ½ to avoid paying a 10% penalty.
  • 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 advisor can help identify what extra cost a rollover may incur and if the benefits of the rollover justify those additional costs.
  • Can take loans out. 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.

Next steps

Your advisor can help you determine if an early 401(k) rollover fits in with your retirement savings plan. They can also help determine what investments are best for you if you do decide to roll over your funds.