If you have multiple retirement accounts, you can often move money between them without tax consequences, and you might want to combine accounts for several reasons. The most common move is to roll from your 401(k) to an IRA, but it’s also possible to do the opposite: You can roll a pretax IRA into a 401(k)—also known as a reverse rollover.
There are pros and cons to everything, and that includes moving an IRA into your 401(k) or 403(b). You might like the investment choices better, or your employer’s retirement plan might have less expensive investments. Simplifying is another reason to transfer IRAs to a 401(k): Clean up those old accounts instead of spending mental energy and time to keep track of multiple accounts.
When I work with clients, we typically dig into the advantages and disadvantages below (among other things). After a careful review of the situation, the next step often becomes clear.
When it Might Make Sense
Here are some of the most common reasons people roll IRAs into 401(k) accounts.
Continue reading below, or watch this video with the same information:
Avoid required minimum distributions (RMD’s): After you reach age 70 1/2, the IRS may require you to take money out of pre-tax retirement accounts, which helps generate tax revenue. But if you are still working, you might be able to wait until you retire to take RMD’s from your 401(k) (the difference being that it’s an employer-sponsored plan, not an individual account). Some owners of the business — even partial owners — aren’t allowed to use that strategy, so check with the IRS or a good CPA before you attempt this. Switching from an IRA to your 401(k) allows you to delay taxes, potentially resulting in more compounding.
Backdoor Roth and conversions: If you plan to convert traditional (pre-tax) IRA money to Roth (after-tax) IRA money — or make “back door” Roth contributions — you might want to minimize pre-tax money in IRAs. Doing so may neutralize the pro-rata rule, which causes complications and taxes when you have pre-tax money in an IRA. By shifting that pre-tax IRA money to your 401(k), only post-tax money remains in the IRA, which simplifies things substantially.
401(k) loans: Some 401(k) plans allow loans, but IRAs do not. Is there any way to borrow against the money in your IRA? If your 401(k) plan allows loans, you could potentially roll your IRA into the 401(k), increasing the amount of money available to you via 401(k) loan. Check with your plan administrator to learn about plan rules and logistics before you get your heart set on anything. Also, just because it’s possible doesn’t mean it’s a good idea. It’s risky to raid your retirement funds.
Age 55 withdrawals: 401(k)s can be more flexible than IRAs if you’re between the ages of 55 and 59 1/2. With an IRA, you have to wait until age 59 1/2 to take withdrawals without penalty taxes (there are exceptions and fancy strategies to avoid the penalty, but let’s assume those don’t apply here). With a 401(k), you can take withdrawals without penalty if you retire at 55 or older. It’s probably not ideal to cash out all of your retirement money when you’re that young, but it’s an option.
Better investments? In some cases, it’s possible to find excellent investments in your 401(k) plan. In particular, you might have a stable value fund that pays a relatively high interest rate without taking market risk (although there may be some insurance company risk present). Those options are typically only available in workplace plans like 401(k), 403(b), and 457 plans. So, if you’re a conservative investor, this may be worth considering.
Creditor protection? Retirement accounts often have some degree of creditor protection. But workplace plans like 401(k) plans could offer the highest level of federal creditor protection. Your IRA and other accounts likely have some protection under state law, but every state is different. If you’re concerned about potential creditor issues, visit with an attorney in your state to find out what course of action is best.
Before You Transfer
If you’re considering a reverse rollover, there are a few things you should check on.
The biggest heartaches I’ve seen occur when people want to get money out of a 401(k) quickly, and for some reason, the employer can’t accommodate that. Plan ahead to avoid frustration.
Getting money into the 401(k): First, make sure your 401(k) plan allows rollover contributions. Every organization is different, and you might not be able to use this approach. If it is allowed, ask your employer what the requirements are for rolling the IRA into the 401(k). You typically submit a form that claims the money really came from an IRA (and you didn’t just write a check from your personal account).
Pre-tax only: You can only transfer pre-tax IRA funds to a 401(k). Under current law, you cannot transfer Roth IRA assets into a Roth 401(k) or Roth 403b. The benefits of doing so might be limited anyway, with the ability to take loans being the primary potential advantage of that strategy. Likewise, after-tax assets in an IRA are problematic if you want to move funds to your 401(k).
Change your mind? Find out if there is any way to get your money back after rolling it into the 401(k) plan. Some companies allow you to withdraw your “rollover” contributions at any time (after all, that money should be fully vested). But your regular payroll deduction contributions and matching dollars can only be distributed under specific circumstances (like termination of employment, hardship distributions, or a loan). Learn the rules before you decide. You need to know if you’ll lose access to that money.
Annual limits: Rolling your IRA into a 401(k) does not reduce the amount you or your employer can contribute to your 401(k) during the year. Those transfers are treated as a “rollover” contribution — so keep adding to the 401(k) plan through payroll. Don’t let confusion about annual limits make you fall short of your retirement goals.
Less control: Your employer controls your 401(k) money. That includes deciding which investment providers to use, influencing fee levels, and controlling when and how money comes out of the account. With an IRA, you’re in control of everything. Make sure you understand what you’re giving up before you do anything.
Getting money out of the IRA: To complete a transfer, you need to provide instructions to your current IRA provider. They typically have specific requirements on how you must submit your request. You might have to use one of their forms or send a letter of instruction that meets certain criteria. Don’t expect to use your 401(k) plan paperwork. A quick phone call or message to your IRA provider should bring the answers you need.
SIMPLE IRAs: Use caution when moving money out of an employer-sponsored SIMPLE IRA plan. If you pull the funds too soon, you might have to pay a 25% penalty tax to the IRS — even if you roll the SIMPLE to another retirement plan like a 401(k) (moving funds to a different SIMPLE account is allowed in some situations). Your SIMPLE needs to be open at least two years to avoid this penalty. SEP IRAs typically do not have this restriction.
To view the question from the opposite perspective, see why you might want to move funds out of your 401(k) and into an IRA.
Want some help with this? Send me an email, and we can chat about where your money might be happiest! Or just see some of my free guides to help you plan and invest. You don’t need to transfer assets to me, and I don’t earn commissions for selling financial products.
Important: The different rules that apply to 401(k) and IRA accounts are confusing. Discuss any transfers with a professional advisor before you make any decisions. This article is not tax advice, and you need to verify details with a CPA. Approach Financial, Inc. does not provide tax or legal services.