Are you wondering how to do a rollover from your IRA to your 401(k) plan? You’ve opened and contributed to a traditional IRA, invested it, waited several months, and you’re now ready to convert it into a Roth IRA. Before you do that Roth conversion, you need to move any pre-tax IRAs out of the IRA into a 401(k) or a similar plan. This includes IRAs like a SEP IRA or a rollover IRA. While a reverse rollover may not be common, there are times an IRA to 401(k) rollover makes sense. In this blog, we will explain the reasons for and against an IRA to a 401(k) rollover and how you can do it.
What is an IRA to 401(k) rollover?
An IRA to 401(k) rollover is when you move funds from a pre-tax IRA to a 401(k) plan. It is also known as a “reverse rollover”. Once the rollover is complete, then the funds in the 401(k) plan are then invested according to the plan’s selected investment options.
What is a reverse rollover?
A rollover is tax terminology for moving money from one retirement account to another. The most common rollover is rolling a 401(k) to an IRA. Rollovers usually happen when you leave your job and can no longer participate in the company’s plan. Moving money the other way, from an IRA to a 401(k) is known as a reverse rollover.
Can I move an IRA into a 401k?
Yes, you can move an IRA into a 401(k). However, some 401(k) plans do not allow for this type of transfer. If they allow this transfer, then a direct transfer is the easiest way to go about it. This allows you to transfer funds directly from your IRA to your 401(k).
Why consider an IRA to a 401(k) rollover?
- You are preparing to do a backdoor Roth IRA conversion: If you are thinking of doing a backdoor Roth IRA, then one of the first things that you need to do is eliminate any money you have in a traditional, SIMPLE, or SEP IRA. If you don’t then you could end up with a surprise tax bill due to the IRS Pro-rata rule when it comes to Roth conversions. One of the easiest ways to do this is to roll your pre-tax IRA into a 401(k) if you have a 401(k) that will accept IRA rollover contributions.
- You prefer convenience over control.
- You want to delay required minimum distributions: The IRS has a mandatory requirement that you begin taking distributions by April 1 of the year following your 72nd birthday. However, you can delay taking distributions from your 401(k) if you are still working. This will potentially result in more compound interest over time.
- You want to access your money earlier: You cannot usually withdraw your IRA until 59 ½ without triggering the government’s 10% early distribution penalty. Money from your 401(k) may be eligible for withdrawal at the age of 55 under certain circumstances.
- Stronger legal protection: Federal law protects all of your 401(k) assets in the event of certain legal troubles.
- Streamlining your accounts: Some people like to consolidate their retirement accounts to make it easier to manage their investments and keep track of their savings.
- 401(k) loans: While we generally do not recommend that you do a 401(k) loan, some 401(k) plans do allow for loans if needed. IRAs do not allow loans.
What are the disadvantages of an IRA to 401(k) rollover?
- Less control: With an IRA you have full control of your assets. With a 401(k), your employer controls some aspects, such as where the money is and which investments are available to you.
- Fees may be higher: While some 401(k) plans may offer lower fees than IRAs, some may also be higher. It’s important to compare the costs of both before making a decision. Once you have completed your 401(k) rollover then you are stuck with the fee schedule for a 401(k). This can sometimes eat into your retirement savings. For an IRA, you can shop around for the plan with the lowest fees.
- Tax implications: When you roll over your IRA to a 401(k) plan, there can be tax implications. It’s important to consult with your financial advisor before doing the rollover.
- Unable to do a rollover if you have a Roth IRA: Roth IRAs cannot be rolled over into 401(k) plans.
How do I complete an IRA to 401(k) rollover?
Step 1: Check eligibility with your employer
The first step is to check whether your employer’s 401(k) plan accepts IRA rollovers. Every organization is different and you may not be able to do an IRA to 401(k) rollover. If they do allow it, then you will want to make sure that you do a direct transfer, if available, to make sure that you don’t incur the 10% penalty.
Step 2: Open a 401(k) account
If you don’t already have a 401(k) account with your employer then you will need to open one.
Step 3: Contact your IRA provider and request distribution
The next step is to request a distribution from your IRA. There will be some paperwork to fill out. Generally, “Direct rollover” is what you enter as the reason for distribution. They will then send either a check or do an electronic transfer to the 401(k) trustee. This ensures that you never receive the money personally so you won’t be liable for any taxes. This transaction is tax-free and penalty-free.
Step 4: Follow up to make sure that the IRA to 401(k) rollover is complete.
Make sure that the funds have been deposited into your 401(k) plan.
Are there any tax implications for an IRA to 401(k) rollover?
Rolling over an IRA to a 401(k) plan can have several tax implications, so it’s important to understand these before making the switch. If you are rolling over a traditional IRA to a traditional 401(k), then the transfer is tax-free. However, if you are rolling over a traditional IRA to a Roth 401(k) plan then you will also need to pay taxes on that transfer amount.
Do I need to report the rollover on my tax return?
You must report direct and indirect rollovers on your annual tax return. You will receive a 1099-R from your IRA brokerage. This will have the amount that you withdraw on it. Report that number on your 1040 tax return on the line labeled “IRA distributions”. If the amount on your IRA withdrawal and the amount you deposited into your 401(k) don’t match then you may be subject to a 10% tax penalty on that difference.
How many times can you do a rollover?
Rollover IRAs are only allowed once per year.
Can I invest in both an IRA and a 401(k)?
Yes, you can invest in both an IRA and a 401(k) as long as you are eligible.
Thinking of rolling over your IRA to a 401(k) in 2024?
If you have multiple retirement accounts, you can often move money between them without consequences. The most common move is to roll your 401(k) to an IRA, but it is possible to roll a pre-tax IRA to a 401(k). The biggest piece of advice is to check with your 401(k) provider to see if they will let you do an IRA to 401(k) rollover before starting the process. The different rules that apply to 401(k) and IRA accounts can be confusing. When considering a rollover of any kind, it’s best to work with a certified financial planner to make sure you are on the right track.
If you want help with your finances and are interested in having a comprehensive financial plan, feel free to schedule a discovery call today!
Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.