Does your current employer 401(k) plan allow you to rollover into an IRA?

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Looking into moving from your employer-sponsored 401(k) plan to an IRA? One important consideration is that your past employer’s 401(k) plan will certainly allow you to roll your funds out of the plan and into an IRA or new employer’s 401(k) plan. There are US Department of Labor rules that require the ability to allow the rollover. However, your current employer’s plan could be a different story. 

What is an in-service rollover?

An in-service rollover takes place when you ask your 401(k) administrator, at the company you are currently employed with, to transfer your account balance directly to another retirement plan or an IRA. This would not be a taxable event and would allow you more control over how you invest, but the 401(k) plan may not be set up to allow it.  

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Why do some 401(k)s administrators allow in-service rollovers while others don’t?

Many 401(k) administrators do not allow you to take your money out until you separate from service, which typically means leaving your place of employment. Different retirement plan providers have different policies around in-service rollovers. 

We’ve seen some employer plans allow a certain percentage of the plan balance to be rolled out of the plan, and some have a minimum length-of-service or age requirement before you can initiate a rollover. But many 401(k) plans do not allow it at all, and there are no rules to prevent them from doing so. 

The 401(k) plans that don’t allow you to roll your funds out while you are still with the employer-sponsored retirement plan don’t have tax code constraints that cause this. The reason is that the plan administrator doesn’t want you to leave with your money yet. Employers would have to pay a higher fee to the plan administrator to provide plan administration services if they didn’t have your money in the mutual funds accruing fees they benefit from. After you separate from service or leave the company, the US Department of Labor requires that they send you your requested rollover paperwork as early as reasonably possible.  

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How do rollovers work with the Yieldstreet IRA?

Direct rollover

In the scenario where Yieldstreet is working with a direct rollover, funds from your 401(k) are going directly into your Yieldstreet IRA. In this case, there doesn’t need to be a tax withholding if you don’t want one. 

Indirect rollover

However, in the scenario where we are working with an indirect rollover, when the rollover is released to you as a distribution, the 401(k) plan administrator is required to withhold 20% of the rollover amount in taxes. Even though you could then roll these funds into your Yieldstreet IRA within 60 days of the distribution and make it a non-taxable event, they still have to withhold it. The withholding is sent to the IRS and credited to your tax account. No additional taxes are accrued in this instance, and you will have to pay taxes at some later day when you take a taxable distribution.

Check if the rollover is possible before you start 

While you may be highly motivated to move your retirement funds via a rollover, it may not be possible with your current employer. So before you get too excited about rolling your current employer’s 401(k) plan into an IRA, check with your employer’s 401(k) plan administrator to see whether it’s allowed. It can be a time-consuming process. We also recommend being aware of your alternatives to a rollover and the recent changes to rules on 401(k) loans and hardship distributions through the CARES Act.

Please note, Yieldstreet does not provide tax or accounting advice, so please consult with your tax or accounting professional for advice specific to your situation. If you have any questions, please feel free to contact us at [email protected]

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