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I was wondering if anyone can shed some light on rolling a 401k into an IRA while still employed with the company providing the 401k? I ask because I want to buy a house and use some of my retirement for a down payment. I'm not interested in taking a loan out, and it looks like the taxes and penalties would be more severe than rolling the 401k over. Any advice?

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Rollover from 401k to a Roth IRA is allowed since 2008.

BTW my company's plan allows only in-service rollover for:
- compa... (more)

SlowLoris (Jun. 02, 2008 @ 11:15p) |

Thanks for that update; forgot about that change effective 1/1/08. Here is a fatwallet thread on that topic.

fw101 (Jun. 03, 2008 @ 1:02a) |

What about people that get laid off for a period of time and draw unemployment. I work in the construction industry and... (more)

steaktaco (Jun. 03, 2008 @ 1:39a) |

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Terra4mer said: I was wondering if anyone can shed some light on rolling a 401k into an IRA while still employed with the company providing the 401k? I ask because I want to buy a house and use some of my retirement for a down payment. I'm not interested in taking a loan out, and it looks like the taxes and penalties would be more severe than rolling the 401k over. Any advice?
First: What did your plan administrator say when you asked? Whether you can take loans from your 401k, when you can rollover etc. are all governed by the plan documents.

Second: It would be unusual for a plan to allow a rollover to an IRA while you are still active in the plan.

I am pretty sure that the IRS does not allow 401(k) to IRA rollovers while you are still employed. It is possible if you have two employers at the same time to rollover a 401(k) from one employer to the other, but almost all plans will not allow it.

uutxs said: Whether you can take loans from your 401k, when you can rollover etc. are all governed by the plan documents.No. A rollover is a type of withdrawal. By law, 401(k) money (i.e., your salary deferrals and their growth) cannot be withdrawn while you still work for the plan sponsor if you're under 59 1/2, unless you meet one of a handful of exceptions (like becoming disabled, or having the employer cease to offer any defined contribution plan). If the plan allows hardship withdrawals, they might be available in this case, but they can't be rolled over. This restriction does not apply to other kinds of money in the plan, like any matching contributions or after-tax contributions, but those are usually a fairly small portion of the balance.

BradMajors said: It is possible if you have two employers at the same time to rollover a 401(k) from one employer to the other, but almost all plans will not allow it.None of them allow it, because it's illegal if you're under 59 1/2 and don't meet the other exceptions. The question is whether you still work for the employer, not whether you work somewhere else.

So in essence, I need to take a hardship withdrawal for a down payment, I cannot rollover the 401k into an IRA and save myself the hardship penalty. Lame.

Almost always a bad idea to take funds out of tax deferred account to finance a house. If you can't save for a down payment, you probably can't afford the house.

LH2004 said: uutxs said: Whether you can take loans from your 401k, when you can rollover etc. are all governed by the plan documents.No. A rollover is a type of withdrawal. By law, 401(k) money (i.e., your salary deferrals and their growth) cannot be withdrawn while you still work for the plan sponsor if you're under 59 1/2, unless you meet one of a handful of exceptions (like becoming disabled, or having the employer cease to offer any defined contribution plan). If the plan allows hardship withdrawals, they might be available in this case, but they can't be rolled over. This restriction does not apply to other kinds of money in the plan, like any matching contributions or after-tax contributions, but those are usually a fairly small portion of the balance.

BradMajors said: It is possible if you have two employers at the same time to rollover a 401(k) from one employer to the other, but almost all plans will not allow it.None of them allow it, because it's illegal if you're under 59 1/2 and don't meet the other exceptions. The question is whether you still work for the employer, not whether you work somewhere else.

The specific plan documents can be MORE restrictive than what the IRS allows. That is why it is important that you not just rely on the IRS provision but check with your administrator as well. This may be a moot point in this particular scenario if the IRS provisions itself disallows what the OP wants.

I dont see how matching contributions necessarily "are usually a fairly small portion of the balance." Really depends on the matching percentage.

Could you engineer a quit and re-hire so as to detach the funds for the rollover?

My guess is no employer would go for such shenanigans.

Plus countless other considerations (vacation days per year, vesting, employee match etc).

So we're just thinking hypothetically here as practically it's not, well, practical.


I dont see how matching contributions necessarily "are usually a fairly small portion of the balance." Really depends on the matching percentage.


Wifey's employer matches dollar for dollar, so I'd guesstimate that almost 50% of hers is matching contributions. There's been some interest paid on 401(k) loans and before she met me she used to contribute more than needed to get the match so it is less than 50%. Yes the latter is not the correct strategy for those that simultaneously lock into CDs because 'rates might fall' and fixed rate mortgages because 'rates are headed to the sky!'. People like that definitely need to max their 401ks.

Good info. I am having a hard time getting a hold of the administrator for this.

revheck said: Almost always a bad idea to take funds out of tax deferred account to finance a house. If you can't save for a down payment, you probably can't afford the house.

Divorce, Boss...divorce. I had a nice chunk of change, but that's been consumed by the succubus.

I worked for employer A and rolled the 401K to new employer B's 401K. While still working I was allowed to roll the employer A's funds out into an IRA-rollover account. However funds deposited while working for employer B could not be rolled out.

the 10k lifetime limit, is it for 401k and IRA's combined or is it 10k for 401k AND 10k for the IRA account

Terra4mer said: So in essence, I need to take a hardship withdrawal for a down payment, I cannot rollover the 401k into an IRA and save myself the hardship penalty. Lame.

I guess I'm still not quite sure how, if this were allowed, it would save you the hardship penalty. If you rollover from your 401(k) into an IRA, you still can't use that money for a down payment... unless I'm missing something?

sjoy1 said: the 10k lifetime limit, is it for 401k and IRA's combined or is it 10k for 401k AND 10k for the IRA accountNeither. It's $10,000 for IRAs only.

LH2004 said: No. A rollover is a type of withdrawal. By law, 401(k) money (i.e., your salary deferrals and their growth) cannot be withdrawn while you still work for the plan sponsor if you're under 59 1/2, unless you meet one of a handful of exceptions (like becoming disabled, or having the employer cease to offer any defined contribution plan). If the plan allows hardship withdrawals, they might be available in this case, but they can't be rolled over. This restriction does not apply to other kinds of money in the plan, like any matching contributions or after-tax contributions, but those are usually a fairly small portion of the balance.

How about if you are now working part time on an hourly basis, but still for the same employer? I'm going back to school yet still working part time for same employer where have a 401k (used to work full time). Since I'll have very low taxable income this year that could = serious advantage to rolling over 401k to roth IRA... if iRA will allow it without penalty.

Dman081 said: How about if you are now working part time on an hourly basis, but still for the same employer? I'm going back to school yet still working part time for same employer where have a 401k (used to work full time). Since I'll have very low taxable income this year that could = serious advantage to rolling over 401k to roth IRA... if iRA will allow it without penalty.Now that is a case where we should all feel some sympathy for someone not able to withdraw from a 401(k) while still employed!

Unfortunately, if you're still an employee, even part-time, you're not going to be able to withdraw. If you became an independent contractor, you could (usually).

You should look into whether you are allowed to withdraw any money you have there other than your own contributions, like if there are any matching contributions.

If you have a lot of money here, and converting would save you a lot, you should seriously consider quitting the part-time job. But I know that that may mean (officially or not) losing the right to come back full time, benefits, etc.

Good luck.

thok said: Terra4mer said: So in essence, I need to take a hardship withdrawal for a down payment, I cannot rollover the 401k into an IRA and save myself the hardship penalty. Lame.

I guess I'm still not quite sure how, if this were allowed, it would save you the hardship penalty. If you rollover from your 401(k) into an IRA, you still can't use that money for a down payment... unless I'm missing something?


Its my understanding that you can use up to 10k from an IRA as a down payment without penalty. As for avoiding the hardship penalty, I thought I had read that a rollover is not a hardship, therefore, I might get taxed, but not penalized.

Terra4mer said: Its my understanding that you can use up to 10k from an IRA as a down payment without penalty. As for avoiding the hardship penalty, I thought I had read that a rollover is not a hardship, therefore, I might get taxed, but not penalized.
A direct rollover from 401k to an IRA would not incur any tax or penalty. Note that you can only rollover a 401k (not Roth 401k) to a traditional IRA, not Roth IRA.
Edit to add: Direct rollover to a Roth IRA is allowed since Jan 2008. This is only a procedural change that reduces the paperwork involved in a two-step conversion (401k-->trad. IRA-->Roth IRA). The eligibility requirements and tax consequences have not changed.

LH2004 said: uutxs said: Whether you can take loans from your 401k, when you can rollover etc. are all governed by the plan documents.No. A rollover is a type of withdrawal. By law, 401(k) money (i.e., your salary deferrals and their growth) cannot be withdrawn while you still work for the plan sponsor if you're under 59 1/2, unless you meet one of a handful of exceptions (like becoming disabled, or having the employer cease to offer any defined contribution plan). If the plan allows hardship withdrawals, they might be available in this case, but they can't be rolled over. This restriction does not apply to other kinds of money in the plan, like any matching contributions or after-tax contributions, but those are usually a fairly small portion of the balance.

You may want to look at the plan documents for the matching contributions and after-tax contributions. I had significant amounts of these and was allowed to make an in-service rollover. It depends on the plan documents. Ours allows in-service withdrawals twice per year; it doesn't have to be for a hardship.

uutxs said: Terra4mer said: Its my understanding that you can use up to 10k from an IRA as a down payment without penalty. As for avoiding the hardship penalty, I thought I had read that a rollover is not a hardship, therefore, I might get taxed, but not penalized.
A direct rollover from 401k to an IRA would not incur any tax or penalty. Note that you can only rollover a 401k (not Roth 401k) to a traditional IRA, not Roth IRA.


Rollover from 401k to a Roth IRA is allowed since 2008.

BTW my company's plan allows only in-service rollover for:
- company match
- after tax contribution
- rolled over amount

Of course you need to pay taxes, however no penalty for rollover.

SlowLoris said: uutxs said: Note that you can only rollover a 401k (not Roth 401k) to a traditional IRA, not Roth IRA.
Rollover from 401k to a Roth IRA is allowed since 2008.

Thanks for that update; forgot about that change effective 1/1/08. Here is a fatwallet thread on that topic.

What about people that get laid off for a period of time and draw unemployment. I work in the construction industry and get three months off in winter. Could I roll my 401k over into my Roth IRA? Would I have to pay taxes on the 401k rollover? Would this be a good idea? Thanks.



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