It’s not uncommon for someone to roll over a 401(k) into an IRA, particularly after they leave a job and want more flexibility in managing their retirement funds. But some investors find it makes sense for their retirement planning strategy to perform a “reverse rollover” and transfer an IRA to a 401(k). Experts advise weighing the pros and cons to avoid unintended tax consequences by making the switch.
Can you roll an IRA to your 401(k)?
A frequently asked question by some investors is, “Can I roll an IRA into a company 401(k)?” The answer is yes—IRA rollovers to 401(k)s are permissible by the IRS, as long as the employer’s plan allows for it. As shown in the IRS rollover chart, investors are allowed to move money from an IRA into a 401(k) account. And when done correctly, investors can do this without incurring taxes, since the funds are going from one tax-advantaged retirement account to another.
Similar questions about this type of rollover include SIMPLE IRAs, Roth IRAs, and 401(k)s:
- Can you roll a SIMPLE IRA into a 401(k)? Yes, but investors must have had the SIMPLE IRA for at least two years. The start date for the two-year waiting period is when investors began participating in the SIMPLE IRA.
- Can you roll a Roth IRA into a 401(k)? No, the IRS doesn’t allow this type of rollover because the contributions received different tax treatment. Roth IRA contributions are made with after-tax funds. The earnings are withdrawn tax-free during retirement, so rolling that money into a 401(k) would forgo the benefits of the Roth IRA in the first place.
- Can you roll a 401(k) into an IRA without penalty? Yes, although investors would lose out on features unique to a 401(k), such as taking out a 401(k) loan. They would gain more control over fees and investments.
Benefits of rolling over an IRA to a 401(k)
Here are some of the potential benefits of rolling an IRA into a 401(k):
- Broader access to funds. Retirement funds can be accessed as early as age 55 after an individual leaves work, compared to having to wait until age 59 ½ for access to IRA funds. Additionally, 401(k) account holders can take out a loan against their invested funds. They may borrow up to $50,000 over a five-year period, however, early repayment may be triggered if they leave the company.
- Employer benefits. Some companies offer features like access to a financial advisor or inexpensive target-date retirement funds, which may make an IRA to 401(k) rollover appealing to some.
- More protection from creditors. Funds in a 401(k) are typically protected against creditors, bankruptcy, and lawsuit judgments. IRA funds are usually only protected when investors file for bankruptcy.
- Potentially postponing RMDs. Both IRAs and 401(k)s come with required minimum distributions (RMDs). That means once investors reach a certain age, they are required by the IRS to start withdrawing money from their retirement account each year. The RMD age is 72 for both IRAs and 401(k)s. IRA distributions are mandatory, regardless of employment status. But if investors continue to work beyond that age, they can avoid taking RMDs from their 401(k) until they retire.
The drawbacks of rolling over an IRA to a 401(k)
There are some reasons investors may hesitate to roll over IRA funds into a 401(k).
- Higher management fees. 401(k) plans tend to have higher management fees, which usually include both investment and administrative fees. In some cases, additional consulting fees for financial advisor services may also be tied to a 401(k) plan. Many investors may not even know the fees they’re being charged, but will have little to no choice since the employer chose the plan. With an IRA, investors can choose any brokerage or robo-advisor they want.
- Fewer investment options. Most employer 401(k) plans have a limited number of investments from which to choose. Target-date funds are common and come with preselected asset allocations based on when an investor expects to retire. 401(k) account holders usually can’t invest in stocks, and ETFs and mutual funds are likely to be limited.
- Fewer penalty-free early withdrawals. 401(k)s and IRAs both provide several exceptions for early withdrawal penalties. In some cases, investors can avoid the 10% penalty (but still have to pay taxes) on withdrawals for things like unreimbursed medical expenses (must be 7.5% or more of the investors adjusted gross income), court-ordered alimony, or child support. With an IRA, investors get access to two additional exceptions: qualified higher education expenses and buying a home the first time (with a lifetime limit of $10,000).
How to roll an IRA into a 401(k)
The IRS offers two separate rollover strategies to consider when making the switch from an IRA to a 401(k). However, each company may have its own rules about whether they’ll accept rollover funds. A company’s HR department may be able to advise how to proceed.
- Direct rollover: With this approach, the IRA plan administrator rolls funds directly into the 401(k) account. No taxes will be withheld from the transfer amount.
- 60-day rollover: Here investors have 60 days from the date they received a distribution to roll it over to another plan. (The IRS may waive the 60-rollover requirement in certain situations if investors miss the deadline.) Taxes will be withheld from a distribution, so investors will need to use other funds to roll over the full amount of the distribution.
Having a clear rollover plan ahead of time can help investors avoid unnecessary tax liabilities when transferring IRA funds into a 401(k).
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