Roll Your IRA Into a 401(k)?

by Michael on Apr 3, 2013 · 4 comments

Image of 401(k) Nest Egg

Much has been written about the virtues of rolling over your 401(k) into an IRA. But what about doing the opposite?

Believe it or not, there are cases in which you might want to roll IRA funds into a 401(k) plan.

Note that not all 401(k) plan administrators allow this maneuver. But if yours does (ask if you’re not sure), then you might consider doing it under specific circumstances.

Before we get started, there are a few things to keep in mind:

  1. Only traditional (not Roth) IRAs are eligible for such rollovers.
  2. You can only roll over tax deductible contributions and earnings so if you have non-deductible contributions you’ll have to leave them behind.
  3. Assuming that the trustee allows it, whatever I say regarding 401(k) plans goes for 403(b) and 457(b) plans, as well.

Now… Why might you want to roll an IRA into a 401(k)?

Keeping things simple

I’m a fan of keeping things as simple as possible when managing your money. So if you have a small (traditional) IRA kicking around and you’re not contributing to it, you might consider streamlining things by rolling it into your 401(k).

As an aside, if the reason that you’re no longer contributing to your traditional IRA is because you’re over the income limits for deductibility, then you should consider funding a Roth IRA instead.

If you’re over the income limits for funding a Roth, then you’ll need to make backdoor contributions. Which brings us to…

Facilitating backdoor Roth contributions

I’ve talked about this in the past but… If you’re above the income limits for contributing to a Roth, you can still funnel money into your account through a traditional IRA, as follows:

Contribute to traditional IRA --> Convert to Roth IRA --> Done.

By definition, your traditional IRA contributions will be non-deductible (because that income limit is lower than the limit for contributing to a Roth) so it’s a pretty straightforward maneuver.

The primary complication is that the the IRS treats all of your IRAs of a certain type as a single bucket of money. Thus, if you already have an IRA with deductible contributions, you won’t be able to make non-deductible contributions and convert just that money to a Roth IRA.

Rather, your IRA funds will be considered in their entirety and you will be taxed on your conversion based on the ratio of deductible:non-deductible funds.

The solution is to roll your deductible IRA contributions (and earnings) into a 401(k) plan before doing the contribute-and-convert thing. Remember…

From point #2, above:

You can only move the deductible contributions and earnings, so this is a great way of isolating your non-deductible contributions (i.e., your basis) and avoiding any unnecessary tax complications.

Note: If you’d like to do this and your 401(k) doesn’t accept IRA rollovers, you should explore the possibility of opening a solo 401(k) to receive your funds.

Better investment choices

While 401(k) plans are often criticized for high fees and limited investment choices, there are good plans out there. This is probably more the exception than the rule but, especially if you’re just starting out…

Your 401(k) plan might actually offer better investment choices than your IRA. For example, they may provide access to institutional share classes with lower fees than are typically available to individual investors with low balances.

Earlier access to your money

Finally, an underappreciated feature of 401(k) plans is that, if you’re planning on retiring early, you can access your money considerably sooner than with an IRA.

Indeed, 401(k) withdrawals can be made starting at age 55 vs. 59.5 for IRAs. Thus, by moving your money into a 401(k) you’ll be able to access it nearly five years sooner. That’s a pretty major advantage.

Here again, if your employer’s 401(k) plan doesn’t accept IRA rollovers, you might wish to explore the possibility of opening a solo 401(k) to receive the rollover.

1 Jose April 5, 2013 at 9:26 am

I had to read this post! It goes against conventional wisdom, bit if you are not managing your money and need easier access to it (401k loans) then it makes sense!

2 Michael April 5, 2013 at 10:15 am

Jose: The ability to take out loans against 401(k) holdings is another important distinction. I left this out because I generally think that such loans are a bad idea — but they’re definitely a possibility. Thanks!

3 Layne April 5, 2013 at 12:37 pm

Yes, this is absolutely the way to go. If you are a Federal employee, you can also sweep your pre-tax contributions and earnings into the Thrift Savings Plan (the Federal employee version of a 401(k)) and convert your basis to a Roth IRA in a non-taxable event.

4 linda December 2, 2013 at 2:09 am

“…..convert your basis to a Roth IRA in a non-taxable event….?”
can you explain more? pre-tax IRA roll into TSP and convert to Roth without any tax?

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