Reverse Rollovers - Know The Rules 

While driving your car, the key concept is that you are driving forward. However, in instances of having to parallel park in that tight spot downtown or backing into a parking space, you must shift gears to reverse.

Take into consideration the same concept with rollovers between 401k plans and IRA’s. Most of the time you’ll be considering a rollover from the 401k plan to an IRA. But sometimes it makes sense to consider a “reverse rollover” – from an IRA to a 401k.

First, let’s address the downside: Before withdrawing your IRA, check with your plan administrator to make sure you can do a reverse rollover. 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.

Additional bad news: The IRS doesn’t allow reverse rollovers of Roth IRA funds or after-tax IRA accounts.

So, why bother? Here’s why:

  • If you work past age 70 ½, required minimum distributions are not required from 401k 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 401k 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 401k 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 401k plan rather than in an IRA.
     

  • If you’re considering converting a traditional pre-tax IRA contribution to a Roth IRA, 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 401k plan fees are often lower than IRA fees.

IRA-to-401k rollovers are made the same way as 401k-to-IRA rollovers – either through a direct rollover or through a 60-day rollover. A direct rollover is the safer way to go.

Now, before you shift into reverse here are some good reasons to keep your money in an IRA:

  • You can access your IRA savings at any time; 401k payouts can be made only upon certain events

  • Several of the exceptions to the 10% early withdrawal penalty are available for IRA distributions, but not 401k payouts.

  • While 401k investment choices are limited, you have many more options for your IRA investments.

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