Reverse Rollover
I am working with a client who wants to retire at age 56. We are working through options to fund retirement income in the years between 56 and 59 1/2. The client has an IRA from a previous 401(k) rollover for which we are considering a reverse rollover into his current employer’s 401(k). My question is, would the funds rolled from the IRA to the 401(k) be characterized in a way that they could not be used under the post age 55 withdrawal rule?
Permalink Submitted by Alan - IRA critic on Fri, 2016-04-08 17:28
No, the IRA funds rolled into the 401k will be qualified for the age 55 separation penalty exception just like the rest of the 401k balance. However, in order to be beneficial for distributions prior to 59.5, the plan must allow periodic and preferably flexible distributions over that period of time. If the plan restricted distributions to a lump sum and forced 3 or 4 years of expenses to be distributed, a potential increase in the marginal bracket could offset the benefit of avoiding the penalty. If the plan is not restrictive however, this approach is preferable to doing an IRA rollover and starting a rigid 72t plan from the IRA.