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By Jenn Pavlick
July 28th, 2023
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If you’ve recently started a new job, you might be curious about your options for consolidating old and new retirement accounts. Most of the time, rollovers involve moving an old 401(k)from a former employer into an IRA (Individual Retirement Account) of your choice.
While not as common, it’s also possible to make a transfer in the other direction by rolling an existing IRA into a 401(k) retirement plan.
In this article, we’ll review:
In short, the answer is yes. It’s not as commonplace as a 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 simple and can be completed by following these steps:
In general, you can roll most traditional IRAs into traditional, pre-tax 401(k) plans, but you cannot roll over a Roth IRA into a 401(k), even if it’s a Roth 401(k). This rule is based on the difference in tax implications of a traditional versus a Roth account.
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. They involve transferring your IRA directly to your 401(k) provider without it ever touching your hands. This helps you avoid tax penalties and early distribution penalties.
If you opt for an indirect rollover, you’ll receive a check for your IRA account balance – as an individual. You’ll then 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 to keep the rollover penalty-free. If you don’t, you’ll owe federal taxes (and possibly state and/or local taxes) on the entire rollover amount.
For most people, it’s better to opt for a direct rollover (sometimes called a direct transfer) when moving funds from a previous employer-sponsored retirement plan to a new employer’s plan or your IRA (Individual Retirement Account).
Almost always, the answer is yes. Assuming your 401(k) provider allows transfers into their plan, there shouldn’t be any issue with a reverse rollover involving your traditional IRA.
One potential issue is if you have non-deductible contributions in your 401(k). These are contributions for which you did not receive a tax deduction.
You may be unable to transfer the non-deductible portion of your IRA to your 401(k) plan, so it’s best to check with a tax advisor, a financial advisor, or your 401(k) plan administrator.
Some of the more common reasons you might want to do this type of rollover are to consolidate your accounts, access your retirement money sooner, protect your funds at the highest level, and gain access to 401(k) loan options.
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) tax-deferred funds early and without penalty.
Remember that both 401(k)s and traditional IRAs will both have Required Minimum Distributions (RMDs) that will come into effect later in retirement.
Compared to IRAs, 401(k) plans offer increased creditor protection under ERISA (Employee Retirement Income Security Act) federal 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 to be protected in these scenarios.
If you have existing pre-tax IRAs and earn more than the IRS outlines as the limit to contribute directly to a Roth IRA, you will run into tax problems if you try to complete a backdoor Roth IRA contribution.
By rolling your pre-tax IRA into your pre-tax 401(k), you’ll eliminate the major hurdle in making Roth IRA contributions if you’re a high earner.
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 transfer investment products and 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.
If you do take a loan, 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, like moving funds from a 401(k) to an IRA.
There are many reasons why you might not want to roll over an IRA to a 401(k), including maintaining the flexibility an IRA offers, keeping the low-cost pricing of an IRA fee structure, and focusing on your Roth IRA.
IRAs offer much greater investment flexibility than 401(k)s. Most 401(k) plans offer a simple menu of pre-selected mutual funds — a list you have no control over. Plan offerings have substantially improved over the last several years, but you won’t have much choice regarding the funds your company’s brokerage 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 for investment management purposes.
401(k) plans, especially the older, more antiquated plans, may come with high administrative, management, and processing fees. That’s in addition to the underlying expenses in 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.
Roth IRA rollovers to Roth 401(k)s (or qualified plans of any kind) are not permitted. Remember that with a Roth account, you pay taxes on the funds before you invest, but in exchange receive the opportunity for tax- and penalty-free withdrawals later in life.
IRAs and 401(k)s offer different tax benefits, and it makes sense to take advantage of both accounts to maximize tax planning opportunities and retirement savings.
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.
Let the experts at Capitalize handle your 401(k) rollover, for free!
Our online process and team of experts make it easy to roll over your 401(k) fast
Instead of a rollover IRA transfer to your 401(k), consider the following possibilities:
Although it’s more common to roll over your 401(k) into an IRA, transferring funds in the reverse direction is certainly possible and may have benefits that you find worthwhile.
Completing a rollover while changing jobs or preparing to retire can be challenging, so working with a trusted partner like Capitalize can help you complete the process stress-free.
If you’re considering rolling your 401(k) to an IRA, explore how Capitalize can help manage the entire process for you – for free.
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