Many don't know this, but if you are currently participating in an employer-sponsored retirement plan such as your 401(k) plan, you may not have to keep all your retirement savings locked in the employer plan and wait until you change jobs or retire to rollover your funds into an IRA. On the contrary, you may be allowed to take an in-service distribution and roll over your retirement funds from your current employer-sponsored plan to an IRA.

There are many benefits to an in-service distribution. You will have more control over your retirement assets and you'll be able to manage them before you choose to retire or switch jobs. Unlike in a 401(k), where your retirement savings aren't being actively managed and you are limited to choose from only few investment choices, with an in-service distribution you will gain access to the universe of investments. As long as you roll your assets directly into an IRA, you can avoid any tax penalties and the mandatory 20% IRS withholding tax on your in-service distributions.

Determine if you're eligible

You will need to first find out whether your employer-sponsored plan allows you to take in-service distributions. The terms of your retirement plan should tell you specific eligibility requirements, which can vary widely across different plans, so review your plan documents to find out if you can opt for in-service distributions. If it's too overwhelming to go through your plan documents, just contact your 401(k) plan administrator for a quick answer.

Rollover while you're still employed

There are many advantages to moving portions of your retirement assets into an IRA while you're still working.

Benefits:

Unlimited control. If you roll over your retirement savings into an IRA, you become the account owner and have full control over your assets without any employer-sponsored plan restrictions and more importantly investment restrictions.

Investment diversification. Most employer-sponsored plans have limited investment options to choose from which can inhibit your portfolio's performance. IRAs, on the other hand, provide the universe of investments at your fingertips so that you can essentially diversify your holding and positions across any asset class. This can help diversify your portfolio and reduce and manage your portfolio's risk level.

Beneficiary designation options. IRAs may allow you to name single or multiple beneficiaries, as well as name a trust as beneficiary. They also can allow you to set beneficiary payouts and the like. Since not all IRA custodians offer the exact services, it's important to understand what choices are available to you when you rollover your assets.

Income tax withholding. Qualified plans require 20% IRS income tax withholding on distributions. However, you have the choice to opt-out from the withholding tax on IRA distributions.

Weigh out some drawbacks before rolling over your retirement funds

An in-service distribution may have potentially some drawbacks, so you should consider them before you roll over your savings.

Drawbacks:

Age limitations. With employer-sponsored plans, such as your 401(k), participants can stop working at age 55 or older and can take distributions without being charged the 10% early withdrawal penalty. In contrast, with an IRA, you typically can't start taking distributions without penalty until age 59 1/2 (exceptions may apply). So, if you plan on retiring earlier than 59 1/2, you may want to leave your retirement funds in your 401(k).

NUA tax treatment. If you have employer stock in your qualified plan and you elect an "in kind" distribution, you will generally pay ordinary income taxes on the cost basis, but you can defer any appreciation taxes until you sell the shares. When you eventually sell shares of your employer stock, you will be subject to long-term capital gains taxes on the Net Unrealized Appreciation (NUA). This usually is a good strategy when you have highly appreciated employer stock in your qualified plan. However, rolling over employer stock to an IRA takes away your ability from taking advantage of NUA tax treatment.

After-tax dollars. Some qualified plans allow you to contribute after-tax dollars into the plan. These dollars are separated in a qualified plan from pre-tax money and generally can be distributed separately. Once you move after-tax money into a traditional IRA, that money will no longer be segregated and accessible separately because it becomes part of the IRA's nondeductible basis.

Creditor protection. While all IRAs are protected by federal bankruptcy protection laws, there may be other creditor protection laws that may affect IRAs on the state level whereas qualified plans have federal creditor protection.

Fees and expenses. Since qualified plans are not management by professional money managers, participants are not charged some of the fees and expenses that they may potentially apply in an IRA such as mutual fund loads, commissions, and trading fees within the account. Fees and expenses are disclosed in the contract offering, product prospectus, or some other disclosure document.

Rollover your after-tax dollars to a Roth IRA

Some qualified plan participants can take advantage of special opportunities to convert their after-tax dollars directly into a Roth IRA tax free. You will need to check your employer-plan documents or contact a plan administrator to see if this option is available to you and if it is right for you.

Roth IRA conversions

Starting January 1st, 2010, you are eligible to convert your traditional IRAs and your employer-sponsored plan funds to a Roth IRA regardless of you adjusted gross income. Converting you employer-sponsored plan retirement assets to a Roth IRA can give you the advantage of receiving tax-free distributions in the future. In addition, Roth IRAs are not subject to required minimum distribution (RMD) requirements.

Nevertheless talk with your Financial Advisor about whether to convert an in-service distribution to a Roth IRA and whether or not it may make sense for you because these conversions are taxable.

Move your assets to a professional money manager

If your employer-sponsored plan allows you to opt for in-service distributions, talk with your financial advisor to decide if the advantages outweigh the drawbacks. If an in-service distribution makes sense, contact your 401(k) plan administrator to see how much of your retirement savings are eligible to be rolled over, and make the request for the rollover. Your financial advisor will guide you through the process.