There is a lot of confusing information on the internet regarding this. Additionally, there have been changes made by the IRS later than many articles that someone may find by a web search.

I have not found any reliable legal source indicating that it is against the law for a plan to allow for an in-service rollover below 59-1/2, although many sources would claim it can only be done after 59-1/2, but they usually caviate this as "without incurring a tax penalty".

Clearly the industry has reason to steer companies to agree to plans restricting employee options and keep the funds where they are. It also seems typical that HR personnel do not usually have the expertise or a tax attorney or financial consultant.

In the early 2000's I worked for a company that would allow an in-service withdrawal, one time annually. As long as these funds were transfered to a qualifying IRA within the time allowed (60 days), there would be no tax or penalty.

  • 1
    Early 2000s were 15 years ago... Things change, in tax law - quite frequently, unfortunately.
    – littleadv
    Jul 15, 2016 at 5:23

4 Answers 4


Yes, this is restricted by law. In plain language, you can find it on the IRS website (under the heading "When Can a Retirement Plan Distribute Benefits?"):

401(k), profit-sharing, and stock bonus plans

Employee elective deferrals (and earnings, except in a hardship distribution) -- the plan may permit a distribution when you:

•terminate employment (by death, disability, retirement or other severance from employment);

•reach age 59½; or

•suffer a hardship.

Employer profit-sharing or matching contributions -- the plan may permit a distribution of your vested accrued benefit when you:

•terminate employment (by death, disability, retirement or other severance from employment);

•reach the age specified in the plan (any age); or

•suffer a hardship or experience another event specified in the plan.

Form of benefit - the plan may pay benefits in a single lump-sum payment as well as offer other options, including payments over a set period of time (such as 5 or 10 years) or a purchased annuity with monthly lifetime payments.

Source: https://www.irs.gov/retirement-plans/plan-participant-employee/when-can-a-retirement-plan-distribute-benefits

If you want to actually see it in the law, check out 26 USC 401(k)(2)(B)(i), which lists the circumstances under which a distribution can be made. You can get the full text, for example, here: https://www.law.cornell.edu/uscode/text/26/401

I'm not sure what to say about the practice of the company that you mentioned in your question. Maybe the law was different then?

  • Although this is not the answer I was hoping for, after reviewing the uscode cited, I have to agree it is the correct one. So I will not be able to make any arguement on changing this in company policy. I had found 2 other discrepancies in the policy, which I will suggest they update.
    – ashur668
    Jul 15, 2016 at 14:46
  • These restrictions seem redundant in that withdrawing of funds from a 401k plan already carry a 10% tax penalty, which logically should be avertable by rolling over into another tax deferred retirement plan. But with this restriction, no need to worry about penalty, if your under 59-1/2 and still with the company, and no hardship, you can't withdraw no how, no way, penalty or no penalty.
    – ashur668
    Jul 15, 2016 at 14:49
  • 2
    Plans under 401(k) have several restrictions that are intended to make them more "permanent" than alternatives like IRAs. I'm not arguing that this is good or bad, but it is one of several key differences between the types of plans. (I've also been tripped up by these types of restrictions, so I definitely agree that they can be frustrating!) @ashur668
    – user32479
    Jul 15, 2016 at 15:08
  • NOTE! This IRS page describes "rollovers" as an exception to the rule that withdrawals before age 59 1/2 are penalized with the 10% tax, and it explicitly lists withdrawals from "Qualified Plans (401(k), etc.)" as qualifying. Why would they do that if all in-service non-hardship withdrawals before age 59 1/2 were prohibited? Jun 19, 2020 at 20:37
  • Also, this 2008 Forbes article says explicitly that in-service non-hardship withdrawals of employee after-tax contributions are legal before age 59 1/2. Do we know what post-2008 law is purported to have changed this? Jun 19, 2020 at 20:38

You're going to find a lot of conflicting or vague answers on the internet because there are a lot of plan design elements that are set by the plan sponsor (employer). There are laws that mandate certain elements and dictate certain requirements of plan sponsors, many of these laws are related to record keeping and fiduciary duty. There is a lot of latitude for plan sponsors to allow or restrict employee actions even if there is no law against that activity.

There are different rules mandated for employee pre-tax contributions, employee post-tax contributions, and employer contributions. You have more flexibility with regard to the employer contributions and any post tax contributions you may have made; your plan may allow an in-service distribution of those two items before you reach age 59.5.

While your HR department (like most -all- HR departments) is not staffed with ERISA attorneys and CPAs it is your HR department and applicable plan documents that will lay out what an employee is permitted to do under the plan.


I don't think there's a rule -- (I can't comment) but Brick cited IRS rules...but IMO Brick missed one thing -- @ashur668 is not looking for a distribution, but is looking for a rollover.

My best guess: that this part of the ruleset is not well defined, and your (and my) employer have chosen to interpret any withdrawl as a "distribution", even if better characterized a rollover.

A few months ago, I went so far as to explore if I could use a loophole -- my company had just gone through a merger; I was hoping I could rollover some or maybe all of my 401k to my IRA (I remember now, it would have been everything before starting roth 401k contributions). My company asserted this was not permitted, and further asserted that the rumors I had heard were mistaken that when we went through a company spin-off a few years before, that nobody under 59 1/2 was permitted to roll over.

I did a quick search and found IRS topic 413 As far as I can tell, this topic is silent on the matter at hand.

Topic 413 referred me to IRS Publication 575, where I started looking at the section on rollovers. I read some of it then got bored.

Note that we're one step removed -- we are reading IRS publications and interpretations of IRS rules. I don't know that anybody here has read the actual tax law. There may be something in there that prevents companies from rolling over before 59 1/2 that is not well codified in IRS publications.

  • 2
    The law says that a rollover is a type of distribution. Go to the link to the law in my answer and search the page for "eligible rollover". You'll find that there's no such thing. The phrase only appears as "eligible rollover distribution."
    – user32479
    Jul 15, 2016 at 13:29

I believe the currently accepted answer is wrong. As I mention in the comments there, the US Code does not support that answer because it refers to employer contributions

ABA Retirement offers (ERISA-constrained) retirement plans, and these plans explicitly allow non-hardship in-service distributions of after-tax contributions:

After-Tax Employee Contribution Account Withdrawal. If participants are contributing on a after-tax basis to a profit sharing plan, they may request after-tax withdrawals at any time. Withdrawals include the participant’s after-tax contributions and earnings, which are always 100% vested.


(Note that being 59 1/2 is listed as a separate qualifier for taking in-service distributions of pre-tax contributions. In contrast, age is not listed as a requirement for distributing post-tax contributions.)

Retirement plans offered by other providers may not allow such in-service distributions, but this is not due to legal prohibitions.

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