Most of the time, rollovers involve moving an old 401(k) into an IRA of your choice. While not as common, it’s also possible in some cases to roll an existing IRA into a 401(k) plan.
Here, we’ll review some of the common instances where this might make sense, and offer guidance on how to make the move if you decide it’s right for you.
Can You Roll Over an IRA Into a 401(k)?
In short, the answer is yes. It’s definitely not as commonplace as your everyday 401(k)-to-IRA rollover, but there are certain instances where it does make sense to merge your existing IRA into your current 401(k) plan.
The process is pretty simple, and can be completed by following the below steps:
- Review your current IRA. Determine if your existing IRA is a Traditional or Roth IRA. Traditional IRAs typically contain pre-tax dollars, while Roth IRAs hold after-tax dollars. While you can generally roll a Traditional IRA into a pre-tax 401(k) plan, you can’t roll a Roth IRA into any type of 401(k) plan, even if it’s a Roth 401(k).
- Important: If you attempt to roll a Traditional IRA into a pre-tax 401(k) plan, be sure that the IRA contains deductible contributions (this means that you received a tax deduction each time you put money in). If you have non-deductible contributions in your Traditional IRA, you may run into issues with transferring the account.
- Ensure that your 401(k) plan accepts roll-in transfers. While it’s likely that your employer’s 401(k) plan will accept IRA-to-401(k)transfers, it’s not guaranteed. You’ll need to contact your current 401(k) plan provider to see that they’ll accept the money you want to bring over.
- Initiate the transfer. Instead of starting the process from your 401(k) provider, you’ll contact your current IRA provider to determine the documents they’ll need to start the transfer. You may also want to alert your 401(k) provider and let them know to expect an incoming transfer.
- Await the funds transfer. After a few weeks, you should see your IRA monies as part of your 401(k) balance. You’ll then need to take it upon yourself to invest the money according to your broader financial plan and in conjunction with your current 401(k) money.
IRA to 401(k) Rollover Rules
The major rule is that you can roll most Traditional IRAs into Traditional, pre-tax 401(k) plans, but you cannot roll a Roth IRA into a 401(k), even if it’s a Roth 401(k).
A second rule is that you’ll need to be especially careful if you choose an indirect rollover instead of a direct rollover. Direct rollovers tend to be the most straightforward, and involve transferring your IRA directly to your 401(k) provider without it ever touching your hands.
If you do opt for an indirect rollover, you’ll receive a check for your IRA account balance – as an individual. So you’ll need to take it upon yourself to deposit the entire IRA balance (before any tax withholdings) to your 401(k) plan to avoid immediate taxation and penalties.
All-in-all, it’s a far better idea to opt for a direct rollover (sometimes called a direct transfer) when trying this type of maneuver.
Can I transfer a Traditional IRA to a 401(k)?
Almost always, the answer is yes. Assuming your 401(k) provider allows transfers into their plan accounts, there shouldn’t be any issue in going forward with a reverse rollover involving a Traditional IRA.
Another potential issue is if you have non-deductible contributions in your 401(k) (contributions for which you did not receive a tax deduction). It’s possible that you won’t be able to transfer the non-deductible portion of your IRA to your 401(k) plan, so it’s best to check either with a tax advisor or your 401(k) plan provider if you have this type of contribution in your IRA.
Some of the more common reasons that you might want to do this type of rollover are to consolidate your accounts, to access your retirement money sooner, to protect your funds at the highest level, and to gain access to 401(k) loan options.
Access Your 401(k) Funds Earlier
With an IRA, you’ll need to wait until age 59.5 to access retirement funds. Withdrawals before that age are subject to ordinary income tax in addition to a 10% early withdrawal penalty.
By rolling your IRA into your 401(k), you can access the funds as early as age 55, subject to the “Rule of 55” stipulations. If you leave your job at age 55 or after, you’ll be able to tap your 401(k) retirement funds early — and without penalty.
Protect Your Retirement Assets
401(k) plans, relative to IRAs, offer increased creditor protection under ERISA (Employee Retirement Income Security Act) laws. In short, if you were ever to declare bankruptcy or be the subject of a creditor lawsuit, your 401(k) would offer a higher degree of protection from seizure than your IRA would.
That’s not to say your IRA would be entirely on the table, either, but your 401(k) is a better bet when it comes to these types of scenarios.
Make Room for Backdoor Roth IRA Contributions
If you have existing pre-tax IRAs, and earn more than the IRS limit to be able to contribute directly to a Roth IRA, you will run into tax problems if you try to complete a backdoor Roth IRA contribution.
Note: a backdoor Roth IRA contribution involves contributing money first to a traditional, pre-tax IRA, and then converting the amount to a Roth IRA. This only works tax-free if you have no other pre-tax IRAs.
By rolling your pre-tax IRA into your pre-tax 401(k), you’ll eliminate the major hurdle in making Roth IRA contributions.
Get Flexibility with 401(k) Loan Options
Many — if not most — 401(k) plans offer loan provisions that allow borrowers to use up to 50% or $50,000 of their plan balance, whichever is less. Loans from IRAs are not allowed. So if you’re in the market for a loan from your retirement money, you’d need to perform an IRA-to-401(k) rollover first.
401(k) loans should generally be used as a last resort. After all, borrowing from your future retirement can be a risky move unless you’re absolutely sure you can pay the money back. Plans allow a 5-year repayment period, with payments required at least quarterly. There is an exception to the 5-year repayment period if you use the loan to purchase a primary residence.
Most rollovers take place in the opposite direction, from a 401(k) to an IRA. There are plenty of reasons why you might not want to roll over an IRA to a 401(k), including maintaining the flexibility an IRA offers, avoiding potentially higher fees, and focusing on your Roth IRA.
Maintain Investing Flexibility With Your IRA
IRAs offer much greater investing flexibility than do 401(k)s. Most 401(k) plans offer a simple menu of pre-selected mutual funds — a list over which you have no control. Plan offerings have substantially improved over the last several years, but you won’t have much choice when it comes to the funds your company offers.
IRAs generally offer access to the greater investment universe, which includes single stocks, bonds, options, ETFs, and, in some cases, cryptocurrency. If you’re looking for a wide variety of investment choices, you may want to stick with your IRA.
401(k)s Can Have Higher Fees
401(k) plans, especially the older, more antiquated plans, may come with high administrative, management, and processing fees — and that’s in addition to the underlying expenses in any of their mutual fund choices.
This is not always the case — as some IRAs can be more costly — but it’s worth checking to see what your 401(k) plan fees are, and if it’s worth rolling over more money into the plan account.
You Have a Roth IRA
Roth IRA rollovers to Roth 401(k)s (or qualified plans of any kind) are not permitted.
You Want to Keep Your IRA for Later
IRAs and 401(k)s offer wholly different tax benefits, and it makes sense to take advantage of both accounts to maximize tax planning opportunities.
In all likelihood, you’ll want an IRA available to roll future 401(k) plans into, and to provide additional tax-advantaged space for future savings.
You don’t need to feel pressure to move the IRA if you think it’s something you’ll want to use later. Unless you have a specific reason (i.e., you want a 401(k) loan or you want to take advantage of the Rule of 55), keeping your IRA as is makes perfect sense.
Instead of rolling over an IRA to your 401(k), consider the following possibilities:
- Do nothing. There is no mandate that you move your IRA to your 401(k), especially if you’re satisfied with each account and you’re not overwhelmed by either.
- Maintain both accounts. Maintaining and maximizing both retirement accounts is an effective wealth-building practice.
- Change your IRA custodian. If you’re unhappy with your current IRA provider, consider moving to another with lower fees or better investment choices — or both.
If you’re considering rolling over your 401(k) to an IRA, check out our resources page for additional IRA help. Alternatively, feel free to contact us for free-of-cost assistance in effecting your rollover.