Can I Convert 401(k) to IRA Without Leaving Job?

by Mark Kennan

If your 401k plan has been under performing or does not offer the investments you want, you may be looking for a way to move the money to an individual retirement account. Unfortunately, unless your employer has decided to terminate the plan and distribute the plan assets, rollover options are extremely limited if you have not left your job.

Qualified Distributions

The IRS stringently limits when you can take money out of your 401k plan, even if it is to roll over into an IRA. The IRS further restricts which of these distributions can be rolled into an IRA, limiting it to only distributions taken after age 59 1/2 or after you leave your job. You can take hardship distributions from your 401k plan before 59 1/2 without leaving your job, but the IRS prohibits you from rolling a hardship distribution into another retirement account such as an IRA.

Tax Consequences

If you take a distribution from your 401k plan before you turn 59 1/2 and roll it into your IRA, you face tax penalties on two fronts. First, the early distribution from the 401k plan is subject to income taxes and early withdrawal penalties. Second, the IRS will consider this an IRA contribution, not a rollover. The IRS imposes a 6 percent penalty per year the excess contributions go uncorrected. As of 2011, the maximum an individual can contribute to all IRAs in the same year is lesser of $5,000 or 100 percent of adjustable gross income. Individuals 50 and over can deduct $6,000.

Tax Implications

If you are at least 59 1/2 years old, you can convert money from a 401k plan to either a traditional IRA or Roth IRA. If you move the money to a traditional IRA, you do not incur any additional tax liability. However, converting the money to Roth IRA causes you to report the amount of the conversion as taxable income in the year you make the conversion. Therefore, you should plan for how you will pay the extra income taxes before converting the money.

Conversion Options

You can move the money from a 401k plan to an IRA either through a transfer or a rollover. With a rollover, you take a distribution from the 401k plan and have 60 days to put it into your IRA. All rollovers, including those to traditional IRAs that incur no income tax liability, must be reported on your tax return. Typically, the easier option is to move the money through a transfer where your financial institution bypasses paying you the money and moves it directly into your IRA.

About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

Photo Credits

  • Creatas/Creatas/Getty Images