By Ian Berger, JD
When driving your car, most of the time you’re going forward. But sometimes, like when you back into a parking spot in anticipation of beating the traffic after a sporting event or concert, you must shift gears to reverse.
So it is with rollovers between 401(k) plans (or other employer plans) and IRA’s. Most of the time you’ll be considering a rollover from the 401(k) plan to an IRA. But sometimes it makes sense to consider a “reverse rollover” – from an IRA to a 401(k).
Let’s get the bad news out of the way: Although an employer plan is required to allow rollovers out of the plan, there is no requirement for the plan to allow rollovers into the plan. So, before withdrawing your IRA, check with your plan administrator to make sure you can do a reverse rollover.
More bad news: The IRS doesn’t allow reverse rollovers of Roth IRA funds or after-tax (non-deductible) IRA accounts.
So, why bother? Here’s why:
- If you work past age 70 ½, required minimum distributions are not required from 401(k) plans until you leave your job. RMD’s from traditional IRA’s are required at age 70 ½ — regardless of your job status.
- If you leave your job at age 55 or older, you can receive a 401(k) payout without being hit with the 10% early distribution penalty. With a traditional IRA, you usually have to delay your payout until age 59 ½ to dodge the penalty.
- While you can take a loan from your 401(k) plan, you can’t borrow from your IRA.
- Depending on your state’s laws, you may be better protected from creditors if your retirement savings are in a 401(k) plan rather than in an IRA.
- If you’re considering converting a traditional pre-tax IRA contribution to a Roth IRA (a “back-door” conversion), you are much better off if you rid yourself of other pre-tax IRA accounts so as to not be negatively affected by the pro-rata rule. You can do this through a reverse rollover.
- Administrative and investment 401(k) plan fees are often lower than IRA fees.
IRA-to-401(k) rollovers are made the same way as 401(k)-to-IRA rollovers – either through a direct rollover (funds go directly from the IRA custodian to the plan trustee) or through a 60-day rollover (funds are paid to you and you must deposit the funds in the plan within 60 days). A direct rollover is the safer way to go.
Now, before you shift that automatic transmission to “R,” here are some good reasons to keep your money in an IRA:
- You can access your IRA savings at any time; 401(k) payouts can be made only upon certain events (e.g., leaving your job, becoming disabled or incurring a financial hardship).
- Several of the exceptions to the 10% early withdrawal penalty (e.g., higher education expenses and first-time home purchases) are available for IRA distributions, but not 401(k) payouts.
- While 401(k) investment choices are limited, you have many more options for your IRA investments.