A 401(k) plan typically includes a wide array of different mutual fund investment options. When you create your own IRA, you can invest in these same types of funds but you can also buy stocks, bonds and even certificates of deposit. You can roll 401(k) funds into an IRA when you quit your job but opportunities for in-service rollovers are very limited.
401(k) plans were designed as a tax-efficient way of raising cash for your retirement years. Your employer may allow you to withdraw cash from your account if you encounter a financial hardship such as a major medical problem or if you're facing foreclosure. You have to pay income tax and a 10 percent tax penalty on these funds and you can't subsequently roll the cash into an IRA. Some plans allow for in-service withdrawals through which you can roll your entire 401(k) nest egg into an IRA. However, these in-service withdrawals are only open to people who are 59 1/2 or older, and even then, some employers don't allow for these rollovers.
Previously Rolled Funds
The restriction on rolling cash from your 401(k) doesn't apply to funds that you rolled into your current plan from a 401(k) you held with a previous employer. Your former employer's contributions, your account earnings and your own after-tax contributions from the old account can be rolled out of your current employer's plan into an IRA. You can't though roll the money that you contributed on a pre-tax basis to your former employer's account. However, while the IRS tax code allows for these partial rollovers it doesn't require your employer to include a rollover provision in your plan. You need to read the fine print of your 401(k) plan to see if these withdrawals are permitted.
If your current employer decides to terminate its 401(k) plan, you can either take your funds as a taxable distribution or roll the money into an IRA. This situation may arise if your employer decides to cut costs by eliminating certain employee benefits. Retirement vesting rules mean that it can take up to five years before your employer's contributions to your 401(k) actually belong to you. If the plan is terminated, all of the funds are immediately vested which means the entire account balance belongs to you.
You can't move the money if your employer decides to replace the 401(k) with another type of qualified retirement plan. This situation may occur if another firm buys your company and your company replaces its own 401(k) plan with the plan used by the acquiring firm.
If you are unhappy with the performance of your 401(k) but are unable to roll over any of the funds, you should consider changing your investment elections. This may entail moving from stock heavy funds to bond funds or vice versa. Many plans also include cash accounts in which you can stash your money if stock market turbulence gives you the jitters. If the plan doesn't contain many investment options, you could also stop contributing to the plan and start depositing some of your paycheck directly into an IRA. However, when you do this, you miss out on any employer matching contributions.