Written By Jenny Kiffmeyer, J.D – The Retirement Learning Center
“Can an individual roll their traditional IRA into their current employer’s retirement plan?”
Highlights of the discussion
Rolling a traditional IRA to an eligible retirement plan is possible under the Internal Revenue Code [IRC §402(c) and IRC §408(d)(3)] in many cases. Eligible retirement plans include plans under IRC §§401(a), 401(k), 403(b), and governmental 457(b). The transaction is commonly referred to as a “reverse rollover.” However, there are some restrictions, which include the following:
- The qualified plan must have language indicating it allows incoming IRA rollovers (not all plans do), and
- Only pre-tax amounts may be rolled in.
Further, a plan may limit what amounts are acceptable, for example, only those dollars held in a conduit IRA that originated from an eligible plan, and that have not been commingled with other rollovers or contributions.
Pre-tax amounts include (meaning taxable when distributed):
- Deductible traditional IRA contributions,
- Pre-tax dollars previously rolled into the IRA (from another retirement plan or IRA), and
- Earnings on the account.
A reverse rollover can offer strategic advantages such as
- Positioning a traditional IRA that contains after-tax contributions for a tax-efficient Roth IRA conversion,
- Simplifying account management through consolidation and, potentially, reducing fees,
- Allowing a working plan participant owning five percent or less to delay RMDs on the reverse rollover in the plan until after retirement (plan permitting), and
- Permitting a plan participant to use the age 55/separation from service exception to the early withdrawal penalty on the reverse rollover assets.
Furthermore, many plans permit in-service distributions of rollover accounts, but this depends on the plan’s distribution provisions. If allowed, the individual does not lose access to those rollover assets.
Conclusion:
A traditional IRA can be rolled into a current employer’s eligible plan, but only the taxable portion and only if the plan accepts it. Reverse rollovers can be a powerful tool in retirement planning to facilitate tax-efficient Roth IRA conversions, retirement account consolidation, RMD deferral, and access to a new early distribution penalty exception, in some cases.
