You can roll your IRA investments over into a 401(k)—but should you?
Fact checked by Vikki VelasquezReviewed by David Kindness
If you have investments in one or more Individual Retirement Accounts (IRAs) and are starting a new job with an employer that offers a 401(k) plan, you may be wondering: Should you move your assets from your IRA into your new 401(k)?
Though the question is a logical one, it rarely arises because IRA rollovers generally move in the opposite direction, with investors transferring their 401(k) assets to an IRA when they leave a job. Nevertheless, there can be some good reasons to move your IRA(s) into your company’s 401(k).
Let’s look at the pros and cons of this maneuver.
Key Takeaways
- Moving investments from an IRA to a 401(k) is called a reverse rollover.
- Though uncommon, there are advantages to this move, including protection against creditors and delayed required minimum distributions (RMDs).
- The disadvantage of doing this is that most 401(k) plans have more limited investment options than IRAs do.
Understanding Reverse IRA Rollovers
Moving assets from an IRA to a 401(k) is sometimes referred to as a reverse rollover. That’s because the rollover in the opposite direction—from a 401(k) to an IRA—is far more common. This often happens when an employee leaves a job or decides they would like more investment options than a corporate 401(k) offers.
However, it’s important to check whether your employer’s 401(k) accepts this kind of incoming transfer. Some plans do, but others do not. The Internal Revenue Service (IRS) provides guidance as to what kinds of transfers are allowed and how to report them.
As this guidance states, you are only allowed one rollover in a 12-month period, and you must report any transaction when you submit your annual tax return for both direct and indirect rollovers. If you move assets out of your IRA and into your 401(k) or use them for another purpose, your IRA brokerage will send you a Form 1099-R that will show how much money you took out. On your 1040 tax return, report the amount on the line labeled IRA Distributions. The taxable amount you record should be $0. Select “rollover.“
Though this maneuver is uncommon, it can have advantages in some circumstances.
Advantages of Rolling Over an IRA to a 401(k)
There are a number of reasons why you would want to move assets from your IRA into your 401(k):
- Earlier Access to Your Money. IRAs and 401(k)s have different rules for when you can take distributions. You can typically start withdrawing from a 401(k) at 55 but will need to wait until you are 59½ to access the money in your IRA. If you plan on retiring early, this nearly five-year difference could be important.
- Lower Costs. Most 401(k) plans have administrative and other costs that make their expense ratios higher than those of IRAs. However, some 401(k) plans—particularly those at large companies with many participants—might actually have lower fees than your IRA does. This is especially true if you use target-date funds.
- Protection Against Creditors. The assets in 401(k) plans are more protected against creditors than those in IRAs. IRA assets are protected in bankruptcy up to a certain amount, but 401(k) plans have no such limits.
- 401(k) Loans. Borrowing from your 401(k) should be a last resort, but if you are really stuck for cash, it’s important to recognize that some 401(k) plans allow loans. Loans are not permitted for IRAs, so moving your assets into your 401(k) might make them more accessible in an emergency.
Important
Moving investments from an IRA to a 401(k) account might give you more flexibility when it comes to accessing this money. However, it may well limit your investment options, because many company 401(k) plans are relatively limited in the options they offer.
Disadvantages of Rolling Over an IRA to a 401(k)
As with every investment decision, there are also some potential drawbacks to moving your IRA assets into a 401(k):
- Limited Investment Options. One of the advantages of an IRA is that you can invest in nearly anything. But 401(k) accounts, in contrast, are often much more limited. Some company 401(k) accounts only allow you to invest in a few mutual funds, for instance, or encourage you to invest in company stock.
- Low-Cost Investment Advice. Many IRAs provide assistance with investment selection—as long as you don’t mind working with a robo-advisor. A financial advisor can also help you manage investments in a 401(k), of course, but this could be of limited use considering the small, curated investment selection that’s typical of a 401(k).
Can I Put My IRAs Into My Company’s 401(k)?
Yes. This is sometimes referred to as a reverse rollover because it’s more common to move funds the other way, from a 401(k) to an IRA. The IRS provides guidance about how to report these transfers.
How Do I Report an IRA Rollover?
Your IRA brokerage will send you a Form 1099-R that will show how much money you took out of your IRA. On your 1040 tax return, report the amount on the line labeled IRA Distributions. The taxable amount you record should be $0. Choose “rollover.”
Why Should I Put My IRAs Into My Company’s 401(k)?
Rolling over your IRAs into your company’s 401(k) might give you more flexibility when it comes to accessing this money, because 401(k) accounts allow you to take distributions earlier than IRAs. 401(k)s also provide more protection against creditors, and some offer loans.
The Bottom Line
If you are starting a new job with an employer that offers a 401(k) plan, you might be wondering if you can roll over investments from your IRA(s) to your new plan. Though unusual, this move can offer some advantages, such as accessing your retirement funds earlier or, in rare instances, applying for a 401(k) loan. The disadvantage is that 401(k) accounts generally have much more limited investment options than IRAs do.
Read the original article on Investopedia.