The act of rolling over money from IRAs and 401(k) accounts is a common aspect in effectively managing money. But when can you use a reverse rollover?
Usually, rollovers involving 401(k) accounts and IRAs involve moving dollars from a plan to an IRA. But sometimes it makes sense to instead do a “reverse rollover” – from an IRA to a 401(k).
Let’s get some bad news out of the way: Although 401(k)s (and other company plans) are required to allow rollovers out of the plan, they are not required to allow rollovers into the plan. So, before withdrawing your IRA, check with your plan administrator or HR to make sure you can do a reverse rollover. Also, the tax code only allows reverse rollovers of pre-tax (deductible) IRA funds. Roth IRA funds and after-tax (non-deductible) IRA accounts are not eligible. So, why bother with a reverse rollover?
The main reason is to avoid getting hit by the pro-rata rule if you’re converting traditional after-tax IRA funds to a Roth IRA – a “backdoor” Roth IRA conversion. The pro-rata rule looks at all of your non-Roth IRA accounts (including SEP and SIMPLE IRAs) as of December 31 of the year of the conversion. If you have any pre-tax funds as of that date, a portion of your conversion will be taxable. But if you have rolled over your pre-tax IRAs to a 401(k) during that year, you’ll be left with only after-tax funds as of December 31, and the conversion will be potentially tax-free. And, you still can “reverse the reverse rollover,” by rolling the 401(k) funds back to the IRA in the next year.
There are other good reasons to move your IRA to your plan:
But, like with most retirement decisions, there’s another side of the coin. Here are good reasons to keep your money in the IRA:
Check with a knowledgeable financial advisor before finalizing a reverse rollover.
By Andy Ives, CFP®, AIF®
Ed Slott and Company, LLC