3713.05 / What should taxpayers consider when deciding whether to execute a “reverse” rollover from an IRA into a 401(k)?

Nearly every taxpayer is familiar with the concept of rolling funds from an employer-sponsored 401(k) into an IRA. The strategy is a common one for taxpayers once they are no longer employed by the company sponsoring the 401(k)—and can also give the taxpayer more control over the management of their retirement funds. On the other hand, rollovers from IRAs into company-sponsored 401(k)s are relatively rare. There are situations in which executing a “reverse rollover” from an IRA into a 401(k) can be advantageous, especially for those who are interested in minimizing their RMD obligations upon hitting their required beginning date.

Taxpayers should first understand that a 401(k) plan is under no obligation to accept rollover contributions. While all 401(k)s must allow taxpayers to transfer funds out of the 401(k) into an IRA, the reverse is not true. So, before considering the reverse rollover strategy, the taxpayer should check with their plan sponsor to determine whether rollovers are accepted in the first place.

Further, while taxpayers may be entitled to roll pre-tax IRA dollars into a 401(k), the IRS does not allow taxpayers to roll nondeductible or Roth IRA contributions back into a company-sponsored 401(k). In situations where the IRA contains both deductible and nondeductible contributions, the deductible contributions can be segregated and rolled over into the 401(k).

While the benefits of a traditional 401(k)-to-IRA rollover are fairly clear, the benefits of executing a reverse rollover are less obvious. For the right taxpayer, the reverse rollover can allow the taxpayer to avoid taking required minimum distributions (RMDs) once the client reaches their required beginning age (which is currently age 73).