Reverse Rollovers

Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans, and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security and Medicare. This is where we highlight the most relevant topics affecting your business. A recent call with a financial advisor in Massachusetts is representative of a common question on reverse rollovers.

“Can an individual roll their traditional IRA into their current employer’s retirement plan?”

Highlights of the discussion

Rolling a traditional IRA to an eligible retirement plan is possible under the Internal Revenue Code [IRC §402(c) and IRC §408(d)(3)] in many cases. Eligible retirement plans include plans under IRC §§401(a), 401(k), 403(b), and governmental 457(b). The transaction is commonly referred to as a “reverse rollover.” However, there are some restrictions, which include the following:

1. The qualified plan must have language indicating it allows incoming IRA rollovers (not all plans do), and

2. Only pre-tax amounts may be rolled in.

Further, a plan may limit what amounts are acceptable, for example, only those dollars held in a conduit IRA that originated from an eligible plan, and that have not been commingled with other rollovers or contributions.

Pre-tax amounts include (meaning taxable when distributed):

• Deductible traditional IRA contributions,

• Pre-tax dollars previously rolled into the IRA (from another retirement plan or IRA), and

• Earnings on the account.

A reverse rollover can offer strategic advantages such as

• Positioning a traditional IRA that contains after-tax contributions for a tax-efficient Roth IRA conversion,

• Simplifying account management through consolidation and, potentially, reducing fees,

• Allowing a working plan participant owning five percent or less to delay RMDs on the reverse rollover in the plan until after retirement (plan permitting), and

• Permitting a plan participant to use the age 55/separation from service exception to the early withdrawal penalty on the reverse rollover assets.

Furthermore, many plans permit in-service distributions of rollover accounts, but this depends on the plan’s distribution provisions. If allowed, the individual does not lose access to those rollover assets.

Conclusion

A traditional IRA can be rolled into a current employer’s eligible plan, but only the taxable portion and only if the plan accepts it. Reverse rollovers can be a powerful tool in retirement planning to facilitate tax-efficient Roth IRA conversions, retirement account consolidation, RMD deferral, and access to a new early distribution penalty exception, in some cases.