Administrative fees for a 401(k) could actually be cheaper than a traditional IRA and if you plan to work well into your 70’s, keeping your money in a 401(k) will allow you to delay the required minimum distributions until you retire.
Why Do It
Rolling retirement savings from a traditional IRA to a 401(k) isn’t very common (people usually do it the other way around), but if your current employer offers a 401(k) that accepts IRA contributions, it could be worth considering.
- Earlier distribution. If you leave your job, you can start taking penalty-free distributions from your retirement savings at 55 instead of having to wait until 59 ½ with a traditional IRA.
- Lower cost options available. If you work for a large company, investment and administrative costs for retirement accounts tend to be cheaper than when you maintain an account on your own. But, these costs are completely dependent on the plans themselves. So you’ll have to do a side-by-side comparison of what you’re currently paying a brokerage to maintain your IRA versus what you’ll have to pay a brokerage to maintain your 401(k).
- 401(k)’s are protected in bankruptcy. Not that bankruptcy is something you plan for, but if you should have to declare, the entire balance of your 401(k) will be safe from creditors. This is not the case with a traditional IRA, which is only protected up to a total balance of $1,283,025 across all accounts.
- You can take a loan from your 401(k). You will have to pay yourself back with interest, but the interest rate on a 401(k) loan tends to be much cheaper than you’d get on a personal loan anywhere else and you can use the money for anything you desire: a down payment, credit card debt, medical expenses, etc.
- You can put off your distributions. At the age of 70 ½ the IRS requires the owners of all pre-tax retirement accounts to start taking the IRS-determined required minimum distribution from that account. This not only depletes your savings and the growth potential of that account, it could also put you in a higher tax bracket. If you have a traditional IRA, you have to take the required minimum distribution regardless if you’re still working or not. If you have a 401(k), and you’re still working with that employer at the age of 70 ½ you can delay taking the required minimum distribution until you retire.
How to Do It
- Make sure your employer’s 401(k) plan accepts IRA rollovers.
- Request a distribution from your IRA. When doing so, make sure to select “rollover” as the reason. If the brokerage doesn’t know you’re rolling your IRA money into a 401(k), it could withhold 10 percent to pay the tax penalty for early withdrawal. And, any money your brokerage withholds, you will be responsible for depositing into the new 401(k) account from your other personal accounts (e.g. checking, savings, investment). If you don’t supplement the difference from your personal accounts, the IRS will charge you an additional 10 percent penalty on the money the brokerage withheld, adding insult to injury.
- Deposit money into a 401(k) account. Once you receive the distribution, you have 60 days to deposit it into your new 401(k) account. If you delay 60 days past receiving your distribution, the IRS considers the distribution an early withdrawal and will tax and penalize it as such. Some 401(k) allows you to have the brokerage with which you have your IRA address and send the distribution check directly to them, which is the easiest way to do it.
- Report the rollover on your tax return. At the end of the year, you’ll receive a 1099-R form from your IRA brokerage company that shows the withdrawal from the account. When you file your taxes, make sure to accurately report the total amount of the IRA distribution, but under the “Taxable Amount,” field, put $0. Then select, “rollover,” as the reason why.
The ins and outs of retirement accounts can be a little tricky, depending on your situation. So if you have any questions regarding the benefits or mechanics of rolling your IRA into a 401(k), make sure to contact a tax or financial professional you trust.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.