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Tax-Smart Savings: When Does a Reverse Rollover Make Sense?

November 28, 2022

The reverse rollover strategy allows you to move all or some of the funds in an IRA into your current 401(k) or similar employer-sponsored defined benefit plan. We explore this technique here.

The reverse rollover strategy is a retirement and estate planning tool that’s becoming more attractive amid tighter rules for inherited individual retirement accounts (IRAs). Here’s what you need to know before you decide to pursue this approach.

Nuts and Bolts

If you’ve ever left a full-time job, you’re probably familiar with retirement plan rollovers. Typically, you transfer the funds from your 401(k) or other type of employer-sponsored plan into an IRA.

Less known is the reverse rollover. This technique allows you to move all or some of the funds in an IRA into your current 401(k) or similar employer-sponsored defined benefit plan. Not all plans allow such transfers, so it’s important to check with your employer before considering this strategy.

Under IRS rules, you can roll over only pre-tax money using this approach. You can’t roll over funds from a Roth IRA.

2 Methods

The transfer generally is accomplished by either:

  1. A direct rollover. Here, the IRA plan administrator transfers the funds directly to the rollover plan, with no taxes withheld.
  2. A 60-day rollover. With this option, the funds are distributed directly to you, and you have 60 days to deposit them in the rollover plan. Taxes are withheld in case you don’t actually do the rollover. If you do the rollover, you don’t owe taxes. However, you’ll need extra cash because you only have 60 days to deposit the amount distributed plus the amount withheld for taxes, which you probably won't have had refunded from the IRS yet.

Your employer may have its own rules for how rollovers will be accepted in its plan.


Reverse rollovers can pay off in several ways:

Facilitating a Roth conversion. If you have an IRA that includes both pre-tax and after-tax contributions, you can roll over the pre-tax contributions in the 401(k). Then you can more easily convert the remaining balance to a Roth IRA.

Avoiding or delaying RMDs. You generally must begin taking required monthly distributions (RMDs) from your retirement accounts at age 72. But Roth IRAs aren’t subject to this mandate. If you’ve done a Roth conversion, you can avoid RMDs on the transferred funds.

The RMD requirement applies to 401(k) plans, but these plans may have a “still working” exception. If you’re employed when you turn 72 and own 5% or less of the company’s stock — and your employer allows it — you can delay taking the RMDs from your current plan until you retire. This exception isn’t available for traditional IRAs, and taking RMDs on top of a salary could push you into a higher income tax bracket.

Leveraging the Rule of 55. If you leave the job where you have the 401(k) at age 55 or older, you can withdraw money from the plan without falling prey to the 10% early withdrawal penalty. This rule, which doesn’t apply to IRAs, could make early retirement easier. (Of course, any such withdrawals would be subject to ordinary income taxes.)

Protecting yourself. While some 401k plans offer loans, IRAs can’t make loans. In addition, IRA funds have more-limited protection from creditors and lawsuit judgments than employer-sponsored defined benefit plans do.

Potential Disadvantages

Reverse rollovers aren’t without their downsides, including:

More-limited access to your money. You generally can’t access 401(k) plan funds until retirement, except for loans or financial hardship. With an IRA, you can make withdrawals at any time (subject to the 10% early withdrawal penalty if done before age 59½). You also can make IRA withdrawals for first-time home purchases and higher-education expenses without penalty.

Fewer investment options. IRAs offer a wide variety of investments. But 401(k)s usually come with a more-limited, pre-selected slate of options, plus they also have unavoidable management and administrative fees.

Right for You?

A reverse rollover can make good financial sense in certain circumstances — where allowed by the new plan. Our Private Client Services team can help you determine whether this path makes sense for your situation.

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