Roll Over Some 401(k) Money to an IRA / In-service distributions allow employees to diversify their investments

Lindsay Gellman for the Wall St. Journal writes: If you're stuck with lackluster 401(k) investment options, there may be a way to diversify your investments.

Some employers' 401(k) retirement plans allow current employees, regardless of age, to take an in-service distribution, under which they can roll over some funds from the 401(k) into an individual retirement account.

Such a move can be a good idea if your 401(k) investment options are very limited or you'd like more control over where and how your retirement funds are invested. But there are a host of other considerations—and hefty financial penalties if you don't adhere to the rules.

You're bound to have access to a wider array of asset classes through your IRA than your 401(k), says Andrew Rosenbaum, a senior planner at Strategies for Wealth, a financial advisory firm in New York.

With an in-service distribution, you must roll over the money from the 401(k) to the IRA within a 60-day window, according to the Internal Revenue Service. You can either roll over the funds directly from the 401(k) into an IRA or take possession of the funds and then put the money into the IRA within that time frame (the clock starts the day after you take the distribution). Failure to do so typically will result in you having to pay income tax on the distribution as well as a 10% early-withdrawal penalty, if you are under age 59½.

Check with your plan provider to see if there's a limit on the amount you can roll over, Mr. Rosenbaum says. It may be a percentage of your account balance or be limited to your contributions only, for example.

But don't get so carried away with your IRA investment options that you stop contributing to your 401(k). Financial experts say you should continue to contribute at least enough annually to get the maximum employer match, if your employer offers one.

And watch out for financial advisers who propose taking an in-service distribution even though your 401(k) options are just fine, says Dana Anspach, a financial adviser and founder of Sensible Money, an investment advisory firm in Scottsdale, Ariz. Advisers might earn commission on your withdrawal, which can make some all-too-eager to have you take a distribution.