Transfer 401(k) to IRA While Still Employed

The decision to transfer funds from a 401(k) to an Individual Retirement Account (IRA) while still employed can be complex but offers several benefits. This article will guide you through the nuances of this process, its implications, and the strategic considerations involved.

Can You Have an IRA and a 401(k) at the Same Time?

Understanding Dual Retirement Accounts:

It’s possible and often beneficial to hold both an IRA and a 401(k) simultaneously. This approach allows individuals to take advantage of the unique benefits each account offers. For instance, while 401(k)s often come with higher contribution limits and potential employer matching, IRAs offer greater flexibility in investment choices and withdrawal rules.

Maximizing Retirement Savings:

Contributing to both accounts can significantly enhance your retirement savings. As of 2021, the IRS allows contributions of up to $19,500 in a 401(k) and $6,000 in an IRA, with an additional $1,000 for those aged 50 and older. By maximizing contributions to both accounts, you can substantially increase your retirement corpus.

Tax Considerations:

Another advantage of having both accounts lies in tax planning. Traditional IRAs and 401(k)s offer tax deductions on contributions, with taxes deferred until withdrawal, whereas Roth IRAs and Roth 401(k)s allow for tax-free withdrawals in retirement. Balancing contributions between these accounts can optimize your tax liabilities based on your current and expected future tax brackets.

Can I Cash Out My 401(k) While Still Employed?

Rules and Implications of Early Withdrawal:

Cashing out a 401(k) while still employed is generally not allowed, especially if you’re under 59 ½. Early withdrawal often leads to a 10% penalty and the funds being taxed as income. However, some plans may offer loan provisions or hardship withdrawals under specific circumstances.

The Cost of Early Withdrawal:

Tapping into your 401(k) prematurely can negatively affect your retirement planning. Apart from the immediate financial penalties, early withdrawals can significantly reduce your retirement savings, impacting your financial security in later years. It is crucial to consider other avenues for immediate cash needs and preserve your 401(k) savings for retirement.

Cons of a 401k Rollover

Evaluating the Drawbacks:

While rolling over a 401(k) to an IRA can be advantageous, there are certain drawbacks. One of the primary concerns is the loss of potential employer matching contributions, which is essentially free money towards your retirement. Additionally, 401(k) plans often have stronger protection against creditors than IRAs.

Investment Choices and Fees:

401(k) plans may have limited investment choices compared to IRAs, but some offer unique investment opportunities not available in the broader market. Furthermore, while IRAs generally have lower fee structures, it’s essential to compare the fees and expenses of both your existing 401(k) and the IRA you plan to roll over into.

Should I Roll Over My 401k?

Strategic Considerations for Rollover:

Deciding whether to roll over your 401(k) into an IRA should be based on several factors. An IRA typically offers a wider range of investment options, potentially lower fees, and more flexibility regarding withdrawals and estate planning. However, it’s crucial to analyze your current financial situation, retirement goals, and the specific features of your existing 401(k) plan.

Seeking Professional Advice:

Given the complexities involved, consulting with a financial advisor can provide tailored guidance. They can help assess the merits and demerits of a rollover in the context of your overall financial strategy, ensuring that your decision aligns with your long-term retirement objectives.

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

Navigating In-Service Rollovers:

An in-service rollover allows you to transfer some of your 401(k) funds to an IRA while still employed and contributing to the plan. This option is particularly appealing if you seek more investment options or want to consolidate your retirement accounts for easier management.

Procedure and Eligibility:

Not all 401(k) plans permit in-service rollovers, and those that do may have specific rules regarding age and the types of contributions eligible for rollover. The process generally involves deciding the amount to be rolled over, selecting an IRA provider, and coordinating the funds transfer. It’s crucial to ensure that the rollover is executed as a direct transfer to avoid taxes and penalties.

Pros & Cons of an In-Service Rollover

Advantages of In-Service Rollovers:

One of the main benefits is gaining access to a broader range of investments, which can be crucial for diversifying your retirement portfolio. Additionally, if your 401(k) plan has high fees or limited investment choices, moving funds to an IRA can reduce costs and enhance your investment strategy.

Disadvantages to Consider:

However, there are downsides to consider, such as losing the protection from creditors offered by 401(k) plans and the potential for early withdrawal penalties. Moreover, in-service rollovers limit your ability to borrow from your 401(k) and affect any employer-matching contributions.


Transferring funds from a 401(k) to an IRA while still employed is a decision that requires careful consideration of your financial situation and retirement goals. Understanding the rules, advantages, and potential drawbacks is essential. With the right strategy and professional guidance, a 401(k) to IRA transfer can be a powerful tool in your retirement planning arsenal. At American Bullion, we’re committed to helping our clients navigate these complex decisions, ensuring a secure and prosperous retirement.

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