In-Service 401(k) Rollover

In-service means “during the service”.

So, basically an In-Service 401(k) Rollover is a rollover option that allows current employees to roll over funds from their existing 401(k)  plan into an IRA. This allows them to enjoy a wider range of investment options, including mutual funds, stocks and bonds.

How Does In-Service 401(k) Rollover Work?

In order to perform a rollover from a 401(k) account into an IRA, one needs to open an IRA with an eligible financial institution (a broker-dealer, bank or other entity that holds IRAs).

You must then allocate your rolled-over funds into that IRA by making deposits or transferring the funds in your 401(k) account.

Eligibility for In-Service 401(k) Rollover

The eligibility for in-service 401(k) rollover generally depends on what type of plan you hold. This is because different rules and regulations apply for each type of plan.

Note that not all plan providers will allow employees to do an in-service 401(k) rollover and if others do, rules vary for each.

In terms of plan life, eligibility may also differ. There are others who may allow in-service 401(k) rollover for plans that have been existent for a minimum of five years. Some may also allow it even if the plan is only two years old.

In terms of plan type, eligibility may also vary. In-service 401(k) rollover may not be allowed for participants who hold a safe harbor 401(k) plan.

Participants whose employer sponsors a SIMPLE IRA or a Safe Deposit Box Option may not be able to perform in-service 401(k) rollovers either.

So to check on eligibility, it is best to contact your plan provider directly.

Advantages of In-Service 401(k) Rollover

The advantages of in-service 401(k) rollovers include the following:



Restricting Investment Options 

You can restrict your investments to just mutual funds or equity, allowing you to choose from a wider variety of investment choices. For example, you may be able to invest in stocks that the 401(k) plan does not offer.

You can put your investments in a bond fund to shield yourself from risk and also enjoy tax-deferred growth of your gains.

Free Setup Fees and Expenses

Some firms provide free setup fees or low expense ratios for IRAs, allowing you to have more retained earnings for your retirement savings. This is why it is important to do research before opening an IRA.

Ownership Control

When you rollover your 401(k) plan to your IRA, you will be the one in charge of investing. As compared to having a 401(k) provider do it for you under their terms, allowing you to make any changes based on market conditions and other factors.

Disadvantages of In-Service 401(k) Rollover

On the flip side, there are also some disadvantages that come with an in-service 401(k) rollover:


Personal Liability Exposure To Brokerage Firms

Rolling over funds into an IRA could expose participants to the risk of making poor investment choices or getting involved with high-risk, high fee investments from their broker-dealer or financial institution. That way they would be more exposed to liabilities if things go wrong.

Inability to Borrow Funds From an IRA 

Since an IRA is a type of personal retirement savings account, you cannot open one with the intention to borrow from it. Unlike 401(k) plans, which allow borrowing against the plan assets for financial emergencies or other investments prior to retirement, there is no such provision for IRAs.

Age Eligibility for Distribution Is Higher for IRA

A 401(k) account owner may take distributions as early as age 55 following certain guidelines to enable the plan owner to be free from penalty-free withdrawal.

However, for IRA, one may only withdraw funds without penalty at 59 1/2 years of age.

Flexibility Rules May Differ Between Your Old and New Plan Providers

Different rules apply when it comes to the timing of election changes between old plan providers and new ones. This means that if you decide to change your investments post-in service 401(k) rollover, you may lose out on current market conditions or suffer other losses because of transfer errors.

Additionally, different plan providers may also have different withdrawal eligibility requirements which makes it hard to follow.

The Bottom Line

So, in a nutshell, in-service 401(k) rollover is a good option for plan owners who want to be in control of their retirement investments and not have a third party make investment decisions for them.

However, they must also consider the downsides that come with in-service 401(k) rollover because going to an IRA may not be a good fit for everyone even if it comes with more flexible rules, no administrative fees, and other advantages.

Before doing anything like this, make sure you do your research and contact your current plan provider first to confirm whether or not they will allow in-service 401(k) rollover and what their rules are.

So as much as possible, seek out information beforehand about what next steps you need to do for an in-service 401(k) rollover.

Without a doubt, make sure you do not rush into this decision as it can have a huge impact on your retirement savings and future goals.

An in-service 401(k) rollover is the process of transferring your money from one retirement account to another while you are still working with your employer.
In-service 401(k) rollover is a great option to get more control over your retirement savings. Additionally, it allows you to be flexible with the market without having third-parties make investment decisions for you. However, there are also some disadvantages that come with doing an in-service 401k rollover such as personal liability exposure and not being able to borrow from your IRA account if needed.
An IRA is more flexible than a 401(k) plan in terms of investment options.
If you want to transfer your money between providers, depending on your situation, you might have some expenses or fees involved with the process. Therefore, it's important that you understand how much these costs will amount to so you can prepare yourself based on what your provider can provide.
This may be different depending on your provider and industry standards. When it comes to transferring funds between providers, the process is usually more efficient when you submit a direct transfer instead of using tools like checks and wire transfers.

401(k) Plan | A Complete Beginner's Guide

401(k) Meaning

The 401(k) retirement savings account got its name from the Revenue Act of 1978, where an addition to the Internal Revenue Services (IRS) code was added in section 401(k).

Consequently, 401(k) does not stand for anything except for the section of IRS tax code it was created in.

Traditional 401(k) vs Roth 401(k)

There are two types of 401(k) plans: Traditional and Roth 401(k)s.

The traditional 401(k), named after the relevant section of the IRS code, has been around since 1978.

With this plan, any contributions you make to the 401(k) account will reduce your income taxes for that year and will be taxed when they are withdrawn.

Roth 401(k)s, named after former senator William Roth of Delaware, were introduced in 2006.

Unlike a traditional 401(k), all contributions are made with after-tax dollars and the funds in the Roth 401(k) account accrue tax free.

Typically, employees can take advantage of both plans at the same time, which is recommended among financial advisors to maximize retirement savings.

Because of the way the contribution limits work, it is possible to invest different amounts into each account, even year-to-year, so long as the total contribution does not exceed the set limit.

Contributing to Your 401(k) Retirement Plan

Contributing to a 401(k) plan is traditionally done through one’s employer.

Typically, the employer will automatically enroll you in a 401(k) that you may contribute to at your discretion.

If you are self-employed, you may enroll in a 401(k) plan through an online broker, such as TD Ameritrade.

If your employer offers both types of 401(k) accounts, then you will most likely be able to contribute to either or both at your discretion.

To reiterate, with a traditional 401(k), making a contribution reduces your income taxes for that year, saving you money in the short term, but the funds will be taxed when they are withdrawn.

With a Roth 401(k), your contributions can be made only after taxation, which costs more in the short term, but the funds will be tax free when you withdraw them.

Because of this, deciding which plan will benefit you more involves figuring out in what tax bracket you will be when you retire.

If you expect to be in a lower tax bracket upon retirement, then a traditional 401(k) may help you more in the long term.

You will be able to take advantage of the immediate tax break while your taxes are higher, while minimizing the portion taken out of your withdrawal once you move to a lower tax bracket.

On the other hand, a Roth 401(k) may be more advantageous if you expect the opposite to be true.

In that case, you can opt to bite the bullet on heavy taxation today, but avoid a higher tax burden if your tax bracket moves up.

Check out this article from Forbes to see the IRS tax rate tables for 2020, but remember that they are subject to change.

A smart move may be to hedge your bets and divide your contributions between the two types of IRAs.

If your employer allows you to add funds to both a traditional and Roth 401(k), then doing so reduces the potential risks of each.

In this case, you will also have the ability to decide what proportion of your income goes into each account, meaning that as you near retirement and have a clearer idea of what position you will be in, you can put more into one or the other.

When you do decide which avenue to take, make sure to thoroughly evaluate your decision.

Moving funds from one account to another, such as from a traditional to a Roth 401(k), is time consuming and expensive, if even possible.

Likewise, transferring a 401(k) from one employer to another in the event of a job change is also tricky.

You want to make sure that when you put money into your plan, it will be able to sit undisturbed for a very long time.

Pension vs 401(k)

Pensions are similar to a 401(k), but are a liability to a company.

If an employer offers an employee a pension, it means that they are promising to pay out a set amount of money to the employee at the time of their retirement.

There is typically no option to grow this amount, but it also does not require any financial investment from the employee.

Pensions, also referred to as defined-benefit plans, are becoming increasingly rare because it puts the financial burden of offering a retirement fund for employees entirely on the employer.

401(k)s, which are also called defined-contribution plans, take some of the financial pressure off of an employer, while also allowing employees to potentially earn a larger retirement package than they would have with a pension.

How Much Should I Contribute to My 401(k)?

Most financial experts say you should contribute around 10%-15% of your monthly gross income to a retirement savings account, including but not limited to a 401(k).

There are limits on how much you can contribute to it that are outlined in detail below.

There are two methods of contributing funds to your 401(k).

The main way of adding new funds to your account is to contribute a portion of your own income directly.

This is usually done through automatic payroll withholding (i.e. the amount that you wish to contribute, counting all adjustments for taxation, is simply withheld when receiving payment and automatically put into a 401(k)).

The system mandates that the majority of direct financial contributions will come from your own pocket.

It is essential that, when making contributions, you consider the trajectory of the specific investments you are making to increase the likelihood of a positive return.

The second method comes from deposits that an employer matches.

Usually employers will match a deposit based on a set formula, such as 50 cents per dollar contributed by the employee.

However, employers are only able to contribute to a traditional 401(k), not a Roth 401(k) plan.

This is especially important to keep in mind if you want to utilize both types of plans.

A key variable to keep in mind is that there are set limits for how much you can add to a 401(k) in a single year.

For employees under 50 years of age, this amount is $19,500, as of 2020. For employees over 50 years of age, the amount is $25,000.

If you have a traditional 401(k), you can also elect to make non-deductible after-tax contributions.

The absolute limit, counting this choice and all employer contributions, is $57,000 for employees under 50, and $63,000 for those over 50 as of 2019.

Plan in Advance

Allow us to help you prepare and plan for your retirement ahead. Contact a financial advisor in St Helena, CA or visit our financial advisor page for other details.

401(k) Plan FAQs

Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.