An In-Service Rollover Might Be Right for You

Suppose you ever left an employer with a retirement plan you contributed to. In that case, you probably have been given information on how to rollover your old employer’s plan to another eligible retirement plan, like an IRA. A rollover occurs when you withdraw funds from an eligible retirement plan, like a 401(k), to another eligible retirement plan, like another 401(k) or an IRA, within 60 days. This typically occurs when you leave an employer, but many people 59 ½ or older can roll funds from their current 401(k) into an IRA and still contribute to their current employer’s plan. It is a little-known strategy called an in-service rollover, and it can benefit your retirement plan by opening investment options and creating tax advantages that will be beneficial as you approach retirement and beyond.

What is an In-Service Rollover

An in-service rollover is transferring assets from your current employer's eligible retirement plan, like a 401(k), to an Individual Retirement Account (IRA). Generally, depending on your employer's plan details, you can roll part or all of your funds into an IRA. It is important to note that not all plans allow for in-service rollovers, and it is entirely up to the employer's discretion. Most plans will allow in-service rollovers for 59 ½ or older employees. Sometimes, the plan will restrict in-service rollovers to employees serving a certain number of years. The information about in-service rollover eligibility can be found in your plan’s summary description. You could also ask your plan administrator.

Advantages of Utilizing the In-Service Rollover

1)     Increased Investment Options

Most employer-sponsored retirement plans are limited to the investment options that they offer in that plan. For example, 401(k)’s typically have a handful of mutual funds to choose from and provide at least one option for each equity asset class, as well as some bond funds and target date funds. Having a 401(k) is nice because often you will receive a company match of some kind, and the amount you can save in a 401(k) is much higher than an IRA. An in-service rollover allows you to invest in whatever you want with the money you roll over while continuing to save to your 401(k). This can provide opportunities to invest in individual companies, better mutual funds than were offered in your plan, and different types of investments like treasuries, real estate, or commodities.

2)     Tax Advantages

An in-service rollover allows one to take advantage of certain tax strategies, like converting funds to a Roth IRA. This allows you to diversify your assets between taxable, tax-deferred, and tax-free accounts and can help you control your tax liability during your withdrawal phase. Also, an in-service rollover does not have any tax impact if implemented correctly.

3)     Optimizing Your Retirement Plan

Doing an in-service rollover gives you the opportunity to re-evaluate your retirement plan and optimize your investment strategy to meet your risk tolerance and needs.

4)     Possible Lower Fees

You might experience lower fees outside of the employer-sponsored plan between lower expense ratios and plan administrative fees.

5)     Ability to Continue Contributing to Your Plan

Having the ability to continue contributing to your employer-sponsored plan gives you the opportunity to continue to receive your match from your employer and gives you the ability to save a considerable amount annually on top of what you can save in your IRA. This can also reduce your taxable income if you make pre-tax contributions to your employer plan.

6)     Not Limited to IRA Contribution Limits

A common misconception about rollovers is that it will affect how much you can save in your IRA. A rollover does not count toward your yearly IRA contribution limit. There is also no limit to how many 401(k) rollovers you can do.

7)     Professional Management

If you do not have a financial advisor, you should. They can help you develop a plan to reach your retirement goals and help you avoid blunders that many investors make trying to plan their retirement on their own. They can also provide peace of mind while you work toward your retirement goals and during your retirement years. Executing an in-service rollover allows your advisor to better match your investments with your retirement goals, income needs, and risk tolerance.

Considerations

There are several considerations to keep in mind before attempting an in-service rollover. First, are you even eligible? Does your plan even allow it? Generally, in-service rollovers are only available to those 59 ½ or older and meet whatever other criteria the plan requires. You can find this information in your 401(k)-summary plan description or talk with your plan administrator or financial advisor, and they should be able to help. Another consideration is the frequency at which you do in-service rollovers. Although there is no limit on 401(k) rollovers to IRAs, there will still likely be a small fee that the plan administrator will charge for each rollover. If you do not already have an IRA, you must open that before initiating the rollover. This will be required information for the plan administrator. If you have accumulated after-tax or Roth dollars in your 401(k), you must set up a Roth IRA before attempting your in-service rollover.

Conclusion

If you have the opportunity to do an in-service rollover, you should consider the advantages and also know the requirements for eligibility and fees that may be associated with it. Speaking with a financial advisor is highly recommended. I or any of our other advisors at Whitaker-Myers Wealth Managers can help you navigate the process to avoid any potential pitfalls or mistakes when executing an in-service rollover. We will also discuss your retirement goals, assess your risk tolerance, and build a customized portfolio to meet your specific situation. If you would like to discuss more about an in-service rollover or have the opportunity yourself, please reach out to me, and let’s schedule a meeting.