Most people transfer their 401 (k) plan savings to an IRA when they change jobs or retire. However, most 401 (k) plans allow employees to transfer funds while they are still working. Of course, you'll still have to comply with the 60-day rule on accruals. In other words, you have 60 days from “the date you receive the distribution of a retirement plan” to transfer it to another plan, according to the IRS.
Taxes are generally not withheld from the amount of the transfer, and these can be processed with a check payable to your new plan or qualifying IRA account. These plans have no specific time restrictions. However, if the plan were to retire your old 401 (k) plan, you'll have 60 days from the time they canceled the plan to transfer it to another retirement account. You have 60 days from the date you received the cash or assets from your 401 (k) plan to include them in another retirement plan.
Instead, you can (and often should) opt for direct reinvestment, meaning that the money goes directly to the new account. If you value the simplicity of having all your retirement funds in one place, want to minimize account maintenance fees, or want to prepare to take advantage of the Rule of 55, a transfer from the 401 (k) plan to the 401 (k) plan may be a good option. In addition, a reinvestment in service allows your personal financial advisor to provide you with more practical help, since at least some of your assets are in an IRA that you control and not in an employer-sponsored 401 (k), which could entail conditions. You have several options for transferring money from the old provider to the new one, but direct reinvestment is the best option.
All you have to do is provide your old employer with your new plan information and they will handle the renewal for you. A direct reinvestment occurs when your previous employer transfers your 401 (k) balance to the account you chose. If you don't transfer your 401 (k) plan on time, you'll be subject to income tax and a 10% early withdrawal penalty. Many people benefit from converting a 401 (k) into an accumulated IRA after leaving their job, often in the form of lower fees, a greater choice of investments, or both.
You'll need to complete the documentation to carry out the transfer, and it may be necessary to have some back and forth conversations with your suppliers. By reinvesting in service, transferring some or all of the funds from your 401 (k) plan to a personal IRA can open up more options for your assets. Generally, there are no tax penalties associated with transferring a 401 (k) plan to another 401 (k) plan, as long as the money goes directly from the old account to the new one. The only caveats here are the IRA contribution limits, and if you chose a Roth IRA for your reinvestment, your ability to contribute could be even more restricted.
However, many 401 (k) plans don't allow it at all and there are no rules that prevent it, says investment platform Yieldstreet, on reinvestments in service. Each brokerage and robo-advisor agency has its own process for making a reinvestment, so you'll have to contact the institution to get your new account to see exactly what you need. If you make an indirect reinvestment, which means that the plan administrator sends you the money and you deposit it into the new account, the plan administrator can withhold 20% of your check to pay taxes on your distribution. A reinvestment in service allows the current employee to transfer some or all of their assets from a 401 (k) to an IRA without making what the IRS calls a distribution, which could be subject to taxes.