Rolling Over Your IRA Into a 401(k): A Complete Guide

If you’ve recently started a new job, you might be curious about your financial planning options for consolidating old and new retirement accounts. Most of the time, rollovers involve moving an old 401(k)from a former employer into an IRA (Individual Retirement Account) of your choice.

While not as common, it’s also possible to make a transfer in the other direction by rolling an existing IRA into a 401(k) retirement plan.

In this article, we’ll review:

• How you can roll your IRA into a 401(k)
• What the benefits are
• Why you may not want to roll your IRA into your 401(k)
• The other options available to you

Can You Roll Over an IRA Into a 401(k)?

In short, the answer is yes. It’s not as commonplace as a 401(k)-to-IRA rollover, but there are certain retirement planning instances where it does make sense to merge your existing IRA into your current 401(k) plan.

How to Roll Over an IRA Into a 401(k)

The process is simple and can be completed by following these steps:

• Review your current IRA. Determine if your existing IRA is a Traditional or Roth IRA. This is important since the distinction has tax consequences. Traditional IRAs typically contain pre-tax dollars, while Roth IRAs hold after-tax dollars. While you can generally roll a traditional IRA into a pre-tax 401(k) plan, you can’t roll over a Roth IRA into any 401(k) plan, even if it’s a Roth 401(k).
  • Important: If you attempt to roll a traditional IRA into a pre-tax 401(k) plan, be sure that the IRA contains deductible contributions (meaning that you received a tax deduction when you put the money in). You may encounter issues transferring the account if you have non-deductible contributions in your traditional IRA.
• Ensure that your 401(k) plan accepts roll-in transfers. While it’s likely that your employer’s 401(k) plan will accept IRA-to-401(k)transfers, it’s not guaranteed. You’ll need to check with your current employer’s plan administrator to see if they’ll accept the money you want to bring into the retirement plan.
• Initiate the transfer. Instead of starting the process from your 401(k) provider, you’ll contact your current IRA provider to determine the documents they’ll need to start the transfer. You may also want to alert your 401(k) and let them know to expect an incoming transfer from your IRA’s financial institution.
• Await the transfer of funds. After a few weeks, you should see your IRA assets as part of your 401(k) balance. You’ll then need to take it upon yourself to invest the money according to your broader financial plan and in conjunction with your current 401(k) money.

IRA to 401(k) Rollover Rules

In general, you can roll most traditional IRAs into traditional, pre-tax 401(k) plans, but you cannot roll over a Roth IRA into a 401(k), even if it’s a Roth 401(k). This rule is based on the difference in tax implications of a traditional versus a Roth account.

A second rule is that you’ll need to be especially careful if you choose an indirect rollover instead of a direct rollover. Direct rollovers tend to be the most straightforward. They involve transferring your IRA directly to your 401(k) provider without it ever touching your hands. This helps you avoid tax penalties and early distribution penalties.

If you opt for an indirect rollover, you’ll receive a check for your IRA account balance – as an individual. You’ll then need to take it upon yourself to deposit the entire IRA balance (before any tax withholdings) to your 401(k) plan to avoid immediate taxation and to keep the rollover penalty-free. If you don’t, you’ll owe federal taxes (and possibly state and/or local taxes) on the entire rollover amount.

For most people, it’s better to opt for a direct rollover (sometimes called a direct transfer) when moving funds from a previous employer-sponsored retirement plan to a new employer’s plan or your IRA (Individual Retirement Account).

Can I transfer a Traditional IRA to a 401(k)?

Almost always, the answer is yes. Assuming your 401(k) provider allows transfers into their plan, there shouldn’t be any issue with a reverse rollover involving your traditional IRA.

One potential issue is if you have non-deductible contributions in your 401(k). These are contributions for which you did not receive a tax deduction.

You may be unable to transfer the non-deductible portion of your IRA to your 401(k) plan, so it’s best to check with a tax advisor, a financial advisor, or your 401(k) plan administrator.

Reasons to do an IRA to 401(k) Rollover

Some of the more common retirement planning reasons you might want to do this type of rollover are to consolidate your accounts, access your retirement money sooner, protect your funds at the highest level, and gain access to 401(k) loan options.

Access Your 401(k) Funds Earlier

With an IRA, you’ll need to wait until age 59.5 to access retirement funds. Withdrawals before that age are subject to ordinary income tax in addition to a 10% early withdrawal penalty.

By rolling your IRA into your 401(k), you can access the funds as early as age 55, subject to the “Rule of 55” stipulations. If you leave your job at age 55 or after, you’ll be able to tap your 401(k) tax-deferred funds early and without penalty.

Remember that both 401(k)s and traditional IRAs will both have Required Minimum Distributions (RMDs) that will come into effect later in retirement.

Protect Your Retirement Assets

Compared to IRAs, 401(k) plans offer increased creditor protection under ERISA (Employee Retirement Income Security Act) federal laws. In short, if you were ever to declare bankruptcy or be the subject of a creditor lawsuit, your 401(k) would offer a higher degree of protection from seizure than your IRA would.

That’s not to say your IRA would be entirely on the table, either, but your 401(k) is a better bet to be protected in these scenarios.

Make Room for Backdoor Roth IRA Contributions

If you have existing pre-tax IRAs and earn more than the IRS outlines as the limit to contribute directly to a Roth IRA, you will run into tax problems if you try to complete a backdoor Roth IRA contribution.

• A backdoor Roth IRA contribution is a retirement planning strategy that involves contributing money first to a traditional, pre-tax IRA and then converting retirement assets to a Roth IRA. This only works tax-free if you have no other pre-tax IRAs.

By rolling your pre-tax IRA into your pre-tax 401(k), you’ll eliminate the major retirement planning hurdle in making Roth IRA contributions if you’re a high earner.

Get Flexibility with 401(k) Loan Options

Most 401(k) plans offer loan provisions that allow borrowers to use up to 50% or $50,000 of their plan balance, whichever is less. Loans from IRAs are not allowed. So if you’re in the market for a loan from your retirement money, you’d need to transfer investment products and perform an IRA-to-401(k) rollover first.

Since they can impact your future retirement planning success, 401(k) loans should generally be used as a last resort. Borrowing from your future retirement can be a risky move unless you’re absolutely sure you can pay the money back.

If you do take a loan, plans allow a 5-year repayment period, with payments required at least quarterly. There is an exception to the 5-year repayment period if you use the loan to purchase a primary residence.

Why You Might Not Want to Roll Over an IRA to a 401(k)

Most retirement planning rollovers take place in the opposite direction, like moving funds from a 401(k) to an IRA.

There are many reasons why you might not want to roll over an IRA to a 401(k), including maintaining the flexibility an IRA offers, keeping the low-cost pricing of an IRA fee structure, and focusing on your Roth IRA.

Maintain Investing Flexibility With Your IRA

IRAs offer much greater investment flexibility than 401(k)s. Most 401(k) plans offer a simple menu of pre-selected retirement planning mutual funds — a list you have no control over. Plan offerings have substantially improved over the last several years, but you won’t have much choice regarding the funds your company’s brokerage offers.

IRAs generally offer access to the greater investment options universe, which includes single stocks, bonds, options, ETFs, and, in some cases, cryptocurrency. If you’re looking for a wide variety of investment choices and total retirement planning and asset allocation agency, you may want to stick with your IRA for investment management purposes.

401(k)s Can Have Higher Fees

401(k) plans, especially the older, more antiquated plans, may come with high administrative, management, and processing fees. That’s in addition to the underlying expenses in their mutual fund choices.

This is not always the case, as some IRAs can be more costly, but it’s worth checking to see what your 401(k) plan fees are and if it’s worth rolling over more money into the plan account.

You Have a Roth IRA

Roth IRA rollovers to Roth 401(k)s (or qualified plans of any kind) are not permitted. Remember that with a Roth account, you pay taxes on the funds before you invest, but in exchange receive the opportunity for tax- and penalty-free withdrawals later in life.

You Want to Keep Your IRA for Later

IRAs and 401(k)s offer different tax benefits, and it makes sense to take advantage of both accounts to maximize retirement planning opportunities and retirement savings.

In all likelihood, you’ll want an IRA available to roll future 401(k) plans into and to provide additional tax-advantaged space for future savings.

You don’t need to feel pressure to move the IRA if you think it’s something you’ll want to use later. Unless you have a specific reason (i.e., you want a 401(k) loan, or you want to take advantage of the Rule of 55), keeping your IRA retirement plan assets as-is makes perfect sense.

Tax Implications

While we’ve touched on this topic in other parts of this article, let’s quickly summarize the tax implications of IRAs and 401(k)s — and of rolling over your retirement funds from one to the other.

Both IRAs and 401(k)s come in two flavors: Traditional and Roth. Traditional accounts give you a tax break now, but pay regular income taxes later. Roth accounts are taxed today, but offer tax-free income during retirement, making them an attractive retirement planning tool.

While you can roll an IRA over to a 401(k) and vice versa easily if both accounts share the same tax treatment, if you have a traditonal 401(k) and want to roll it over into a Roth IRA, you may see a substantial tax bill in the Roth IRA conversion process. A financial planning professional can help you do this, but in many cases, it may not be worth the additional tax cost.

Since these are retirement plans, they’re built to be accessed during — you guessed it — retirement. Trying to make withdrawals early could lead to an early withdrawal penalty of 10% on top of applicable income taxes.

Finally, keep in mind that both IRAs and 401(k)s are governed by contribution limits, which put a cap on how much money you can contribute to them each year. Employer-sponsored retirement plans like 401(k)s generally have a much higher annual contribution limit than IRAs, so for those whose financial planning strategy is to maximize contributions, keeping your account may be a boon. In either case, overshooting the contribution limits could lead to tax penalties.

IRA to 401(k) Rollover Alternatives

Instead of a rollover IRA transfer to your employer-sponsored retirement plan, consider the following possibilities:

• Do nothing. There is no retirement planning mandate that you move your IRA to your new 401(k), especially if you’re satisfied with each account and not overwhelmed by either.
• Maintain both accounts. Maintaining and maximizing both retirement accounts is an effective wealth-building and retirement planning practice that allows you to make the most of your annual contributions, investment options, and potential tax savings.
• Change your IRA custodian. If you’re unhappy with your current IRA provider, consider moving to another brokerage with lower fees or better investment choices for asset allocation.

Explore Your Rollover Options

Although it’s more common to roll over your 401(k) into an IRA, transferring funds in the reverse direction is certainly possible and may have retirement planning benefits that you find worthwhile.

Completing a rollover while changing jobs or preparing to retire can be challenging, so working with a trusted partner like Capitalize can help you complete the process stress-free.

If you’re considering rolling your 401(k) to an IRA, explore how Capitalize can help manage the entire process for you – for free.