Can I do a rollover/direct distribution of 401k into a traditional IRA while still employed?

Question

Note: I'm looking for "positive" statement that a direct rollover is allowed - i'm sure its allowed by the IRS - i just can't locate anything saying its allowed - in summary - does the IRS actually come out & say u can rollover 401k monies while you're at your current employer? Thanks in advance.

Answer 1

Sorry, but the IRS specifically bars in-service distributions from a 401k.

Excerpt from IRS Pub 560:

Generally, distributions cannot be made until one of the following occurs.

The employee retires, dies, becomes disabled, or otherwise severs employment.

Answer 2

Sorry....you'll be looking for quite a while. Inservice withdrawals are not considered "rollover eligible".

The Code defines an eligible rollover distribtion by telling you what it is not. Section 402(c)(4) of the Code provides:(4) Eligible rollover distribution For purposes of this subsection, the term “eligible rollover distribution” means any distribution to an employee of all or any portion of the balance to the credit of the employee in a qualified trust; except that such term shall not include— (A) any distribution which is one of a series of substantially equal periodic payments (not less frequently than annually) made— (i) for the life (or life expectancy) of the employee or the joint lives (or joint life expectancies) of the employee and the employee’s designated beneficiary, or (ii) for a specified period of 10 years or more, (B) any distribution to the extent such distribution is required under section 401 (a)(9), and © any distribution which is made upon hardship of the employee

However, if the plan allows for distributions from a "rollover account" (ie funds that have been rolled into the 401k) at any time then THOSE can be rolled over into a traditional IRA. OR if you want to divorce your spouse, file a QDRO giving her 100% of your retirement account, have her roll it over into HER IRA, then remarry her...that's an option. An expensive and risky one to be sure...but an option nonetheless. But pretty much everything else taken out while employed is not eligible for rollover.

The fact that Vanguard or any other IRA provider allows for rollovers into the IRA does not mean a thing as to whether they are allowed to be rolled OUT of a plan.

-edited-

The ability to roll over the money is derived from the ability to actually take an inservice distribution. If you aren't allowed to take the distribution then you certainly can't roll it over, right?

Treas. Reg 1.401-1(b)(1)(ii) states that plans that are not pension plans, such as profit sharing plans and stock bonus plans, may provide for distributions after a fixed number of years (at least 2), the attainment of a stated age, or upon any other stated event, regardless of whether the particpant has terminated employment. However, IRC Section 401(k)(2) and (10) defines when someone can take employee elective deferrals even though the 401k arrangement may be part of a profit sharing plan. Section 401(k)(2) and (10) define the proper distribution events which are severance from employment, death, disability, age 59 1/2, financial hardship, and termination of plan. So, the final answer is that if the plan allows it you can take an inservice distribution of all employer contributed money (unless contributed to satisfy a plan's failure of the ADP discrimination test or to satisfy Safe Harbor provisions) and earnings thereon...but they can't take the portion that THEY deferred or the earnings on those funds.

So, you can rollover certain types of monies from a 401k into a traditional IRA while still employed. But, the plan has to allow it and it can't be the employee deferred money or some employer monies. That being said, I've never seen of a plan that had two different rules for distributions: one for employer money and another for employee money. I'm sure there are small plans out there that might allow it...but the mega-majority do not have such provisions. When I answer a question on here I assume that the questioners plan is like the mega-majority...othewise my stock answer would have to be "consult your plan document" which does no one a bit of good.

And regarding the hardship provisions...they are specifically labeled as not being eligible for rollovers. So, too, are loans.

So there's your answer...if the plan allows it you can take parts of the company money but IRC 401k(2) and (10) prevent the employee money from being distributed and thus rolled over. Failure to follow those rules will result in plan operational failure and could be a disqualifying event. Which is exactly why most employers don't have the separate rules...if they make a mistake or multiple mistakes then the whole plan could be disqualified and then the trustees are personally liable for damages...not a good thing.

Answer 3

Digdown, I think the question is still unanswered. You quote from a different place and want us to deduce from it something that isn't stated. For instance, you agree that when you leave an employer, the 401k monies can be rolled over - correct? So how come the monies can't be rolled over while you're still with the employer?

Exactly where does the IRS ever say you can't take the 401k monies out while still employed with the employer?

Feel free to edit your answer & I'll look for your response. Thanks.

Answer 4

Per Pub 560 which Bostonian refers to, there's nothing specific relating to rolling over 401k monies while still with your current employer. There's nothing saying you can; and nothing saying you can't.

Boston refers to restrictions on "disributions," but rolloevers are different. Given that Vanguard allows these rollovers from people with current employers, it seems there should be something in writing allowing it.

Answer 5

properly, as I understand, you've entered in a legal settlement which includes your corporation and the handlers of the 401K to maintain the account as such. A better major question is why flow it? I mean, I do not forget that you're decrease than satisfied with their possibilities, regardless of the indisputable fact that it appears that evidently like they're giving a tournament to each and each contribution you're making. Will a change to a universal IRA conceal that tournament? in the journey that your employers are matching better than 6% of the completed you install (usually, I see about 50% to at least one hundred% matching, much better than any cost I see on any classic IRA) then you absolutely are nonetheless making out better than you ought to get. Pencil it out and do the numbers, you're in a better effective position than you concept.