Should You Move IRA Funds Into Your 401(k) Plan? Here's What to Know
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When changing jobs, most people think about rolling their old 401(k) into an IRA for better control and wider investment choices. But what about doing the opposite — moving your IRA into your new employer’s 401(k)? Though rare, this “reverse rollover” can actually be a smart move in certain cases. Let’s break down why you might consider it, the drawbacks to watch out for, and what steps are involved if you decide to go ahead.
Why Even Think About a Reverse Rollover?
The most common reason to move IRA assets into a 401(k) is to simplify your retirement savings. Instead of juggling multiple accounts, you can have everything in one place. However, there are also specific advantages that go beyond convenience.
One big plus is earlier access to your money. Typically, you can’t touch your IRA funds before age 59½ without paying a 10% penalty. However, if you leave your job at age 55 or later, the “Rule of 55” lets you withdraw from your 401(k) penalty-free. This could be helpful if you plan to retire early.
Another benefit relates to required minimum distributions (RMDs). With IRAs, you must start taking RMDs at age 73 (or 75, if you were born in 1960 or later). But if you’re still working at your new employer past that age and own less than 5% of the company, you can delay RMDs on your current employer’s 401(k). This means you can keep more money growing tax-deferred for longer.
Added Protection and Borrowing Options
One area where 401(k) plans shine is legal protection. Federal law shields 401(k) assets from creditors, lawsuits and even bankruptcy. IRAs have some protection, too, but it’s generally limited.
There’s also the option of taking a loan. While borrowing from your retirement account is rarely recommended, it can be a lifeline in a financial emergency. Some 401(k) plans allow loans — something you can’t do with an IRA.
For those thinking about advanced tax strategies, moving pre-tax IRA funds into a 401(k) can make a backdoor Roth IRA more straightforward. That’s because it helps you avoid the “pro-rata rule,” which can complicate tax calculations when converting after-tax IRA contributions.
The Trade-Off: Control and Flexibility
All of this comes at a cost. The biggest downside of rolling your IRA into a 401(k) is giving up investment flexibility. With an IRA, you can invest in just about anything: stocks, ETFs, bonds, real estate investment trusts and more. Most 401(k) plans offer a much smaller menu, often a limited number of mutual funds or target-date funds.
You might also pay higher administrative fees, depending on your employer’s plan. While some large plans have low fees, that isn’t guaranteed.
However, if you have a Roth IRA, you’re out of luck. Roth IRAs can’t be rolled over into a traditional 401(k). They can only move into another Roth IRA.
Other Drawbacks to Consider
Beyond investment limits, 401(k) plans often have stricter withdrawal rules. You can’t generally withdraw money unless you’re 59½ or meet specific hardship criteria, whereas with an IRA, you can withdraw funds anytime (though you may pay penalties).
Some employers’ plans don’t even accept incoming IRA rollovers. And if they do, there might be other conditions, like vesting schedules, which could tie up your money longer than you would like.
Lastly, 401(k) plans can also have less flexible inheritance options for your beneficiaries, potentially leading to faster required distributions and higher taxes for heirs.
How to Do It If You Decide to Move
If you’re leaning toward a reverse rollover, start by checking whether your employer’s 401(k) accepts IRA rollovers. Not all plans do.
If the plan allows it, the safest method is a direct transfer. This means the money moves straight from your IRA provider to your 401(k) plan without passing through your hands, helping you avoid taxes and penalties.
If a direct transfer isn’t possible, your IRA provider will cut you a check (minus 20% withheld for taxes). You’ll need to deposit the full amount into your 401(k) within 60 days to avoid paying income taxes and the 10% early withdrawal penalty. When you file your tax return, you’ll report the rollover and show that the taxable amount is zero.
Bottom Line
Rolling your IRA into a 401(k) is not a common strategy, but it can be the right move if you’re looking to retire early, want stronger protection from creditors or plan to use strategies like the backdoor Roth. Keep in mind the trade-offs, especially the loss of investment choice and control.