In-Service 401(k) Rollovers - Rules, Pros, and Cons

If you are age 59 and a half or older, your 401(k) may have an option that allows you to roll money from your 401(k) into an IRA tax and penalty free while you remain working for the company. This is called an in-service rollover and there are a couple of scenarios when this can be beneficial.
First, if your 401(k) has a poor selection of investments, or if the investment options have very high fees, you may benefit from rolling your account over to an IRA where thousands of more options are available.
Next, if you want to do Roth conversions and your 401(k) plan does not allow conversions within your plan, you may want to consider an in-service rollover. This would be something to consider if you have a significant amount in pre-tax savings currently, and your current tax rate makes this a good option.
There are several things to be aware of before you do an in-service rollover:
First make sure you know if it will impact your eligibility in your current 401(k) if you plan to keep contributing. Make sure an in-service rollover will not impact your ability to contribute more in the future, or receive company matches to your 401(k).
Next, if you have company stock within your 401(k) that has appreciated significantly, you may want to avoid doing an in-service rollover. This is because doing an in-service rollover may make you ineligible to take advantage of using a Net Unrealized Appreciation, or NUA, strategy which can drastically lower your total tax bill in retirement.
Lastly, make sure you know what new fees will be once the account is rolled over. Particularly if you are rolling the assets to a financial advisor whose fees or commissions are in excess of what you are paying in your 401(k).
At Arnold and Mote, we are flat fee financial advisors, meaning we do not charge more for our services based on the assets you have with us. This gives us an unbiased interest in recommending only the options that in the best interest to our clients.
Sync ID: MB01GAQXRY9UCEN