When a Reverse Rollover Makes Sense

By Ian Berger, JD
IRA Analyst
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In a famous “Seinfeld” episode, George Costanza, unemployed, living with his parents and without a girlfriend, decides to do the opposite of what he would normally do. It pays off for him big time as he lands a front office job with the New York Yankees (after criticizing the owner during a job interview) and begins dating a beautiful woman after approaching her at the coffee shop.

Doing the opposite can also make sense when it comes to rollovers. A rollover between 401(k) funds and an IRA usually involves moving the funds from the plan to the IRA. But sometimes a “reverse rollover” – from an IRA to a 401(k) – is a smart move.

Beware, however, that there are a few roadblocks to doing reverse rollovers. Company plans like 401(k)s aren’t required to allow rollovers into the plan, although many do. So, before withdrawing your IRA, check with your plan administrator or HR rep. Also, the tax code only allows reverse rollovers of pre-tax IRA funds. You can’t do reverse rollovers of Roth IRA and traditional after-tax IRA accounts.

The biggest advantage of doing a reverse rollover is to minimize – or avoid altogether –taxes when you convert after-tax IRA funds to a Roth IRA through a “backdoor” conversion. The tax code’s pro-rata rule looks at all of your non-Roth IRA accounts (including SEP and SIMPLE IRAs) as of December 31 of the year you do the conversion. If you have any pre-tax funds on December 31, a portion of the conversion will be taxable. But if you have rolled over your pre-tax IRAs to a 401(k) during the year, you’ll be left with only after-tax funds as of December 31, and the conversion can be tax-free. And, you still can “reverse the reverse rollover,” by rolling the 401(k) funds back to the IRA in the next year.

There are other good reasons to move your IRA to your plan:

• If you work past April 1 following the year you turn age 73 and don’t own more than 5% of the company sponsoring the plan, RMDs from your pre-tax 401(k) dollars can be delayed until you leave your job.
  
• If you leave your job at age 55 or older (the earlier of age 50 or 25 years of service for certain public safety employees), you can receive your 401(k) without paying the 10% penalty.
  
• If the plan allows, you can borrow from your 401(k) plan.
  
• Depending on your state’s laws, your retirement savings may be better protected from creditors while in a 401(k) than while in an IRA.

But, there are also many good reasons to keep your money in the IRA. These include: earlier access to your funds, easier coordination with estate planning; being able to do QCDs (qualified charitable distributions); wider investment options; and the ability to aggregate RMDs.

So, check with a knowledgeable financial advisor before pulling the trigger on a reverse rollover.