Moving IRA Assets Into a 401(k)

A reverse rollover could benefit high earners and those working past retirement age.

Rollovers can go both ways. A reverse rollover moves money into a 401(k) from an IRA.

Such a rollover could help high earners use what's known as the backdoor Roth strategy. You can't make Roth contributions or deductible contributions to a traditional IRA if your income exceeds certain limits, but there are no income limits on converting a traditional IRA to a Roth or for making nondeductible contributions.

Walter Levonowich, 57, of Brookfield, Wis., faced this predicament. For him, "the only way to get money into a Roth is through a Roth conversion," he says. He says his IRA held after-tax contributions plus deductible contributions.

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Levonowich could have converted the IRA to a Roth and paid a sizable tax bill. His financial planner, Mark Ziety, of Shakespeare Wealth Management, in Pewaukee, Wis., suggested using a reverse rollover as a way around that tax bill.

Usually, when a retirement account has both pretax and after-tax money, a withdrawal is partially taxable—and the calculation to determine the tax bill can be complex. The reverse rollover enabled the pretax and after-tax dollars to be split. "The 401(k) can only accept pretax dollars, so that's how we can separate it," Ziety says. "All the money that's left in the IRA is after-tax dollars."

Levonowich moved the percentage of the money attributed to deductible contributions plus earnings into his 401(k). He converted the remaining, nondeductible contributions to a Roth IRA. Because the tax had already been paid on these contributions, there is no tax bill for the Roth conversion, says Ziety.

Another candidate for a reverse rollover: someone who is still working at age 70 1/2, when required minimum distributions must start. There's an exception to the RMD rule: A worker at that age does not have to take RMDs from the 401(k) of his current employer unless he owns 5% or more of the company. To avoid RMDs while still working, he could roll his IRA and any 401(k)s from former employers into the 401(k) of his current employer. The current 401(k) plan must allow such rollovers.

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Rachel L. Sheedy
Editor, Kiplinger's Retirement Report