Rollover IRA to 401k plan
I have a client who has a rollover IRA, which the funds came from a previos 401k plan and monies were not comingled with any other monies. Now he wants to do a direct rollover from the IRA to his new employer’s 401k plan. As far as I know this is prefectly fine. Can someone please verify this and if you have the IRS RIC please let me know. thanks!
Permalink Submitted by Marvin Rotenberg on Fri, 2010-01-29 21:06
You din’t mention his age but if 70 1/2 or older the 2010 RMD must come out first. The new 401(k) plan must allow for transfer of other money to the 401k plan. Keep in mind that if there are any after dollars they will not be able to go into the 401(k) plan.
Marvin
Permalink Submitted by Alan Spross on Sat, 2010-01-30 00:13
Client’s IRA is known as a conduit IRA because it holds only employer plan rollovers. Some history is probably in order here:
1) Prior to 2002, a 401k plan could accept IRA rollovers ONLY if the IRA was a conduit IRA, but did not have to accept them
2) EGTRRA became effective in 2002 with enhanced portability under which many of the distribution options were mandatory, but the acceptance of rollovers remains optional. Under EGTRRA, a 401k plan could accept incoming IRA rollovers of all kinds if the plan document was amended to allow them, except that no after tax contributions or non deductible contributions could be accepted.
Because you client has a conduit IRA, it is MORE LIKELY that a given plan would accept the rollover than were it not a conduit IRA, but the plan still can legally decline to accept it. Moreover, since 2002 after tax contributions from a 401k plan can be rolled over to an IRA, so an IRA that is titled as a conduit IRA (aka rollover IRA) is no longer guaranteed NOT to contain after tax contributions. Therefore, 401k plans need to be careful even with a conduit IRA that they are not getting after tax amounts rolled into their plans.
Bottom line is that the client will have to check with the plan administrator to determine whether the new plan will accept his rollover, and if so whether he will need to supply any documentation regarding the original source of his IRA.
This year more people are trying to do these IRA rollovers to increase the % of basis in their IRA accounts for Roth conversion purposes. If a plan will accept the full pre tax balance in all client’s IRAs, if client has only basis left, he can convert to a Roth tax free. The other reason why someone would want to roll their IRA into a qualified plan is to gain better creditor protection through ERISA than they would have in some states for IRA accounts.