Can You Rollover Your Current Employer's 401(k) into an IRA?
- Erik James Roberts, Founder & Chief Investment Officer | Infinitus Wealth Management
- Aug 24, 2023
- 3 min read
Are you considering moving from your employer-sponsored 401(k) plan to an IRA? One important consideration is that your past employer's 401(k) plan will certainly allow you to roll your funds out of the current plan and into an IRA or new employer's 401(k) plan. US Department of Labor rules require the ability to allow the rollover. However, your current employer's plan could be a different story.
Understanding In-service Rollovers
An in-service rollover arises when, while still employed, you request your 401(k) administrator to transfer your accumulated funds directly to another retirement account or an IRA. This action is not taxed, giving you greater autonomy in investments. However, not all 401(k) plans might facilitate such a move.
Why the Discrepancy in Policies?
While some 401(k) administrators allow in-service rollovers, others may hold you off until your tenure with the employer ends. Differing policies are prevalent among retirement plan providers regarding such rollovers.
In certain instances, employers may allow a fraction of the accumulated balance to be transferred out, possibly subject to service tenure or age restrictions. Many, however, might disallow such transfers entirely. Their reluctance is grounded in something other than tax stipulations.
Often, it's because administrators aren't eager for you to withdraw your funds. The absence of your funds in the scheme could escalate the fees employers need to compensate 401(k) plan administrators. Nevertheless, post your exit or service termination, they are obligated by the Department of Labor to furnish the relevant transfer documentation promptly.
How do rollovers work?
Direct Rollover: When collaborating with Infinitus Wealth Management on a direct rollover, your 401(k) funds seamlessly shift to your IRA, bypassing any tax deductions if you opt out of them.
Indirect Rollover: Conversely, with an indirect rollover, your funds are first handed to you, with the 401(k) administrator withholding 20% for tax purposes. If you redirect these funds into your IRA within 60 days, this withholding remains a non-taxable event. It is remitted to the IRS and tallied on your tax record. No additional taxes are levied in this scenario, but future taxable distributions would be taxed.
Check if the rollover is possible before you start the process.
If you want to transfer your retirement savings, first ascertain the feasibility with your current employer. Always consult your employer's 401(k) administrator about such transfers. It might be a complex affair. It's also wise to familiarize yourself with other potential routes besides a rollover and to stay updated on recent modifications to 401(k) loan guidelines.
At Infinitus Wealth Management, we offer a complimentary, no-obligation portfolio review for investors who want an independent fiduciary second opinion on how their capital is actually being managed.This is a conversation, not a sales process. If your portfolio is already well constructed, we will say so directly. If we identify avoidable costs, unnecessary concentration, tax inefficiencies, or portfolio structure that may be working against you, we will show you specifically where those issues exist. From there, you decide what to do with the information.
Important Disclosures
Infinitus Wealth Management is a registered investment advisory firm. This article is provided for educational and informational purposes only and does not constitute investment, tax, legal, or accounting advice. It is not an offer or solicitation to buy or sell any security or to enter into any advisory relationship. Any references to specific strategies, withdrawal rates, tax provisions, or historical figures are general in nature and may not be appropriate for any individual investor.
Past performance is not indicative of future results. All investing involves risk, including the possible loss of principal. Tax laws are complex, change frequently, and have unique application to individual circumstances; please consult a qualified tax professional regarding your specific situation. Social Security rules, Medicare rules, and retirement account regulations are subject to legislative and regulatory change.
The information in this article was believed to be accurate at the time of writing but is not guaranteed. Readers should consult with their own qualified advisors before making any financial decisions specific to their situation.
