A reader writes in, asking:
“My employer’s 401k allows for in service distributions. I’ve read that it’s commonly a good idea to roll over a 401k after leaving your job, but I haven’t seen analysis for roll overs while still at your job. Is it basically the same decision?”
For readers who aren’t familiar with the concept of an “in-service distribution,” the basic idea is that 401(k) plans can (but are not required to) allow participants to roll their pre-tax contributions, Roth contributions, and employer match contributions over to an IRA after reaching reaching age 59.5, even while the participant is still an employee of the company.
Factors to Consider
When deciding whether or not to take an in-service distribution, the primary factors are very similar to those for considering whether or not to roll over a 401(k) from a previous employer.
- If the investment costs in your 401(k) are higher than what you’d pay in an IRA (and they usually are), that’s a point in favor of moving the money.
- If you have made nondeductible contributions to a traditional IRA, and you are planning to convert the traditional IRA (or part of it) to a Roth, you may want to hold off on any in-service distributions until the year after the conversion so as to minimize the portion of the conversion that’s taxable as income.
- If there’s lawsuit pending against you (or you have reason to expect one in the future), you may want to keep the money in your employer’s plan to take advantage of the protection that such plans have against court judgements.
Additional Factor: No RMDs While Working
In addition to the above factors, you’ll also want to consider one factor in favor of keeping the money in your current 401(k): There are no minimum distribution requirements from a 401(k) plan while you’re still employed by the company, unless you’re an owner of the company with at least a 5% ownership interest.
The reason the lack of RMDs for employees doesn’t matter when considering regular (that is, not in-service) 401(k) rollovers is that if you’re considering a rollover, you must have already left the company, so there would be RMDs beginning at age 70.5, just as there would be with a traditional IRA.
Still, In-Service Distributions Are Often a Good Idea
As you might imagine, most people do not plan to continue working past age 70.5. And most people do not have any pending lawsuits. Nor are most people considering a Roth conversion of a nondeductible traditional IRA contribution. As a result, for people with the option to do so, it often makes sense to take an in-service distribution as a way to gain access to less expensive investment options.