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WALL OF TEXT AHEAD.

Ok so I don't even know if this is even "possible" but I figured I'd ask. My 401k plan I have is honestly pretty crap, zero matching, really poor rate of return (1-2% on average from past 10 years) and basically... pretty poor choices of investments.

I'm planning on rolling over my 401k plan to an IRA (Roth or Traditional). My 401k website has an "In service withdrawal" with a distribution type of "rollover funds only" and then goes to describe how to do that. (So I'm assuming I'm "allowed" to do that) and this is indeed the rollover I'm talking about.

Now I've been at the job for a little over a year and a half. So what I have in there right now is like... 10K, not a lot but it's only been a year or so. That being said, I was actually considering rolling over the amount to an IRA and then using it for a downpayment on a house. I know crazy right? But right now... I'm pretty financially stable. I have a 5 month emergency fund, but basically rent right now... is kinda keeping my savings down. I've cut EVERYWHERE else possible.

I still save 10%, but rent is increasing QUICKLY around my city and just outside of the city are good housing locations for MUCH cheaper (like a good 300-400 off a month). So I'm really trying to put a downpayment on a house (20% to avoid PMI) and if I'm able to rollover and pull that money out (and avoid 10% penalty since first time homebuyer) it seems like a decently smart move. I have good credit and with my estimations from average houses in the area, my "mortage" would drop from around 1k a month to around 700 or so. (So a decent savings at that).

I know a lot of people will say it's a terrible idea (and I respect that), but I mainly want to know if it's possible. Because paying almost 1k in rent right now is really bumming me out. (I don't want a crazy big house, just a starter home that's cheap).

So is this possible? I'm assuming I would get normal taxes taken out, but really I plan on investing new money (that would've been that extra rent money I'd be paying, since I'll have a cheaper mortage) so a Traditional IRA/Roth that has better returns (which is a whole other subject)

If this is possible, what do I need to do? Are there any "gotchas", as in like what if SOMEHOW their 401k gets better, can I not invest in it anymore if I do a rollover? Same with the IRA? if I withdraw from it early.....will I not be able to contribute (which would be fine, I could just contribute to ANOTHER IRA/type for a few years, since I plan on having 2). Also I'm assuming if I do this, I would need to do something special with my year end tax filing.

I see IRA contribution limit is 5500, can I still do it with 5500? And keep the rest in the 401k. I have no debt (besides a really low interest rate car payment, around 220 a month.)

Thoughts?

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    In general, you cannot roll over money in a 401k account into an IRA unless you quit your job with the employer sponsoring the 401k plan. Be very careful. An in-service withdrawal sounds like the kind of withdrawal that incurs income tax as well as a penalty for early withdrawal (unless it is a qualified withdrawal for some specified reasons.
    – Dilip Sarwate
    Aug 23, 2014 at 16:32

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"rollover funds only" mean the funds one was foolish enough to first roll into this 401(k).

With no matching, and need for cash, I'd stop depositing to that account. But, from details you gave, you can't withdraw that money.

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You should be able to take a loan out on the 401(k). You can't do a roll-over unless you leave your job. If your 401(k) is that bad, you should consider maxing out your IRA contributions first and putting the rest into your 401(k) - so if you're putting away about 7k a year, lower your withholding to 1500 and put 5500 into an IRA.

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