Rolling over your 401(k) to an individual retirement account is common practice when starting a new job. But what about doing the opposite: moving IRA assets into a 401(k) plan? While not nearly as common, these “reverse rollovers” do exist and may be an option if you’re an investor looking to merge multiple retirement accounts. When considering a rollover of any variety, it may help to work with a financial advisor who can guide you on your path to retirement.
Reasons to Roll Your IRA Into Your 401(k)
A reverse rollover occurs when you transfer retirement assets from an IRA that you manage to your current employer’s 401(k) plan. Moving money out of an IRA and into a 401(k) does offer a number of potential benefits.
You Prefer Convenience Over Control
Perhaps you opened an IRA with the intention of putting together a diverse portfolio and actively managing your investments. However, you’re now finding that you don’t have the time or energy to devote to your portfolio and feel that you’re in over your head. Rolling over your IRA to a 401(k) and giving up some control may better fit your needs as an investor.
Delay Required Mandatory Distributions
Workers with traditional IRAs and 401(k)s both face the same reality when it comes to taking mandatory distributions. The IRS requires that you begin taking distributions by April 1 of the year following your 72nd birthday. However, you may delay taking RMDs from your 401(k) if you’re still working and own less than 5% of the company that sponsors the plan.
401(k) Loan Options
Another benefit of rolling over IRA assets to a 401(k) is the potential ability to borrow money from your retirement savings without triggering the taxes and penalties associated with an early withdrawal. However, you’ll be required to repay the loan with interest or the outstanding balance will be treated as an early distribution and taxed accordingly.
Access Money Earlier
Money in an IRA usually cannot be withdrawn before age 59½ without triggering the government’s 10% early distribution penalty. Assets in a 401(k) may be eligible for withdrawal at age 55 under what’s known as the Rule of 55.
Stout Legal Protection
Moving money into your current employer’s 401(k) will also shield your retirement savings from creditors, lawsuits and potential bankruptcy. Federal law protects assets in 401(k) accounts in the event of legal troubles.
Save Money During a Roth Conversion
This is where things can get tricky. If you plan to convert your traditional IRA into a Roth IRA to take advantage of tax-free growth, you can avoid immediate tax consequences by first rolling over any pre-tax contributions over to your 401(k). You’ll want to consult a tax professional when converting a traditional IRA to a Roth option.
Reasons Not to Roll Your IRA Into Your 401(k)
To be clear, the IRA to 401(k) rollover isn’t a panacea. There are specific drawbacks and limitations of moving your retirement savings to your 401(k) plan, which may deter some investors from going this route.
You’ll Lose Control and Flexibility
The most significant benefit of an IRA is the power and flexibility to invest your money how you want. By rolling over your IRA, you’ll be forfeiting a lot of that control and freedom. Your 401(k) plan likely offers a limited number of mutual funds and exchange-traded funds, so you may feel restricted by those offerings if you value greater diversification and oversight.
You Have a Roth IRA
Roth IRAs are popular and power investment tools, because contributions are taxed before they enter the account. As a result, your earnings grow tax-free and aren’t taxed when they are withdrawn. The problem? Roth IRAs can’t be rolled over into 401(k) plans.
How to Complete an IRA to 401(k) Rollover
The first step is checking whether your employer’s 401(k) plan accepts IRA rollovers. Not all plans will allow you to roll over IRA assets. If they do, you’ll want to request a direct transfer to avoid any income tax or the 10% early withdrawal penalty.
If a direct transfer isn’t an option, your IRA provider will send you a check for 80% of your account’s value and withhold the remaining 20% for taxes. You must deposit 100% of the value of your IRA into your 401(k) within 60 days or the transaction will be treated as an early distribution, triggering the 10% penalty and income taxes. The 20% that your IRA provider withheld will serve as a tax credit when you file your tax return.
Like a regular 401(k) rollover, a reverse rollover has its pros and cons. By moving money from an IRA to a 401(k) you’ll benefit from stronger legal protections, potentially delay your RMDs and also have access to your money at age 55 (in some instances). But rolling over an IRA to a 401(k) comes with some drawbacks, namely the ability to invest your money how and when you want. An investor who values convenience over control may like this option, and request a direct transfer to avoid any taxes or penalty.
Saving Tips for Retirement
- Need help planning for retirement? Talk with a financial advisor about your goals. SmartAsset’s financial advisor tool can match you with up to three local financial advisors, and you can choose the one who is best for you. If you’re ready, get started now.
- Take advantage of any 401(k) match that your employer offers. Be sure to contribute enough to your 401(k) to qualify for the matching funds. See if you’re on track to save enough for retirement by using SmartAsset’s 401(k) calculator.
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