In service 401k rollover: Why is it so good?

By Altay Gursel | October 8, 2020

What to know about in-service 401k rollovers?

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In service 401k rollover

You are a working professional but you want to roll your 401k to the IRA. Is that possible, or are you supposed to leave your job to do it?

The term “rollover” is usually used in the concept of retirement or a career change. Because most individuals roll their assets either when they retire or change their job. The common wisdom recommends you can only roll your funds into an IRA when you leave your employer. 

However, you can rollover your 401k to an IRA when you still work in a company. This is known as an in-service rollover, and it is a planning incentive that is often ignored by most people.

What is an In Service 401k Rollover?

An in-service 401k rollover is an opportunity for working professionals to roll their assets into an IRA. In service IRA shouldn’t be confused with orphan 401k rollover which is where you roll your retirement assets from your former employer into a new employer’s 401k or into an IRA plan.

The Profit Sharing Council of America (PSCA) states up to 77% of 401k programs have a certain provision for in-service 401k rollovers. However, some of these programs allow individuals to use an in-service 401k only when a significant event occurs. These events are like hitting the age of 59 1⁄2 years, an unexpected disability, plan termination, etc.

There are a few plans that provide the opportunity to in-service 401k rollover without these initiating occurrences, basically rolling your retirement funds to an IRA whenever you want. That being said, you may be asked to meet with other prerequisites to qualify for that.

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To name a few prerequisites for an in-service 401k rollover, keeping assets in your 401k for at least two years or having the plan in place for a minimum of five years or more.

As an employer, it is very necessary to obtain a copy of the employer’s summary plan description (SPD). It is your blueprint for the 401k rollover options you can make. Most employers provide in SPD documents detailed information about what options employees can have.    

It is also a great idea to get in touch with your 401k plan advisor. However, they may not be willing to tell your entire rollover options for your assets especially if you will control those assets. Therefore know well with whom you are working with and choose a reliable 401k advisor or an administrator.

Why does an In Service 401k Rollover Really Matter? 

If your existing 401k program does not allow in-service rollovers, you can ask the organization to rewrite the plan description as well as changing the plan administrators. This is a major advantage for retirement savers, offering them the choice and discretion they seek on their own assets.

Although most 401k plans limit investment options to a limited list of vehicles paying the highest fees and offering the biggest kickbacks to brokers, IRA investments give you the utmost freedom to invest in stocks, precious metals, real estate, and even start-up businesses. In fact, most retirees prefer a gold IRA rollover over most other available options.

It is also important to note that the rising cryptocurrency trend is also another attractive option to use 401k funds to buy BTC.

Does it mean you rollover your assets only once and it is done?

Absolutely, not. You can still contribute to the plan, even after the rollover is done. You should be able to roll over at least once a year depending on your plan. Fortunately, most plans will allow you to do it more often.

An IRA places you in charge of your assets and will discourage unfair advisors to take advantage of your assets.

There is a recent study done by the University of Chicago professors proving that at least one out of five advisors misconducted with the client’s assets at some point.

Do employers have intent offering in-service 401 K rollovers?

Offering in-service 401k rollovers costs hardly anything to the employers. However, most employers don’t have an idea it even exists. Plan administrators and other 401k advisors would definitely not be in favor of mentioning that.

Because these people make money on the sum of money under their management. Also, they can charge outrageous fees to you if they keep managing your assets but not you.

You can still keep your 401k active

Rolling your 401k into an IRA shouldn’t be interpreted as losing the equivalent employer benefit in the future. You can keep your 401k plan active while you still contribute to it in order to benefit from a tax-deferred investment. 

Performing a 401k rollover simply takes the portion of your retirement plan and moves it to the retirement account you manage. That means you have more control and freedom on your assets.

You will have a great selection of investment options.

Most company retirement plans offer very limited investment options. By having your funds in an IRA you control, you can freely choose where to put your money. You can invest in stocks, mutual funds, precious metals, and even startup businesses.  

It means you can greatly diversify your investments to have a healthier, more balanced investment portfolio safeguarded from economical surprises.

A rollover is a concept that is very simple. It is the process of transferring your company retirement account (401k, 403b, 457, etc.) to an IRA that you have full control over and that is totally independent of your ex-employer.

That is what most people are doing when they retire or change jobs. When correctly done, rolling over funds from the employer’s retirement account to the IRA is a tax-free and penalty-free investment since the tax features of a 401k and IRA are essentially the same.

IRA plans offer more flexibility than 401k or employer retirement plans. Although it is not recommended, you can withdraw money from your IRA for certain expenses like medical expenditures, first time home buyer allowance, higher education expenses, etc. 

👍 Benefits of an In-Service Rollover

Not all 401(k) plans are created the same. Many plans only provide a small number of investment options limited to mutual funds, and a few company shares. Certain plans may offer employees the opportunity to invest in other vehicles like ETFs. However, most  401k plans offer a really poor selection of investment options. 

Rolling over assets to an IRA automatically extends the list of available investment options. It offers individuals more power over their retirement savings. Employees with an IRA can access a wider investor base than they would otherwise get with a 401(k) account. 

Individuals who plan on an in-service rollover can still generally contribute to their employer’s 401k plan. However, it is important to remember each 401k plan has different rules in power. The employee may be temporarily prohibited from making a contribution to their 401k plan following a recently made rollover.

Eligible plan participants should also keep fees in the calculation if rolling their assets into an IRA could reduce their total expenditure. Bear in mind that most of the investments available in an IRA will be associated with fees, and account holders often have to pay a variety of fees such as fund management fees, consultative fees, service fees, and trading commissions.

👎 Drawbacks to an In-Service Rollover

Although it is uncommon, not all company 401k plans would support an in-service roll-over to an IRA. Your first move should be to find out if your company supports it. Then you can determine if an in-service rollover is a right match for you.

Although employees are still usually allowed to contribute to their 401k accounts following an in-service rollover to an IRA, a temporary ban on contributions can be enforced by certain program sponsors if the employee draws assets from the plan. 

Individuals who still want to contribute to their 401k account after the rollover will find out whether they are subject to a penalty as a result of withdrawing their funds.

Individuals usually have to wait until age 59 1⁄2 to withdraw money from retirement accounts without being subject to a 10% tax. On the other hand, many 401(k) plans require retired people to be 55 years or older to withdraw their assets tax-free.  

Although it is not a recommended practice, a 401k loan may offer the required funds for individuals who are in a monetary pinch. Individuals can borrow 401k loans to be paid in a specified time frame in order not to be treated as a taxable payout. However, Individuals are not allowed to take out loans against the rules of their IRAs.

In-service rollovers generally help individuals paying less fees. However, if not done strategically it may also raise the applied fees.

Since individuals have more control over their account and investment options with an IRA, they need to be more careful avoiding investment options that may yield larger fees.

It’s also very important to consider the impact on Net Unrealized Appreciation (NUA) which an in-service rollover can have. Net Unrealized Appreciation allows a person to apply long-term capital gains in a tax-deferred account to the difference between the value in the average cost base and the current market value of the security. 

An in-service rollover can affect the ability of the participant to use NUA in the future to the degree that the strategy is prevented from being used. The situation is peculiar to all investors and it is advised to contact the tax consultants when thinking about NUA.

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