| NEW YORK, April 9
NEW YORK, April 9 It may sound like something
you would train your dog to do, but the "reverse rollover" is a
maneuver that more retirement-minded workers should try.
The move - taking personal individual retirement account
(IRA) assets and moving them into your company 401(k) plan -
sounds counterintuitive. Why would you do that once you have
wrested your money from a former employer and rolled it over
into your very own personally controlled account?
It turns out there are a few reasons. For starters, 401(k)
plans offer some benefits that individual IRAs do not.
You can access your money penalty-free at a younger age if
you retire early. The funds in your 401(k) have greater
protection against legal judgments. And you may find the 401(k)
offers a better investment package at lower costs than you can
find on your own.
Currently, 69 percent of company 401(k) plans allow workers
to bring IRA money to them, according to the Plan Sponsor
Council of America, an employer group. Workers can only move IRA
money that was seeded with pre-tax dollars, either via a
rollover from an earlier 401(k) or from contributions that were
originally tax-deductible when they were made to the IRA.
The strategy does not seem to be well-publicized, and it is
not clear whether many workers take advantage of it.
Now there are a couple of new reasons why reverse rollovers
may become more popular. Last week the U.S. Treasury Department
and the Internal Revenue Service issued guidance making it
easier for companies to accept reverse rollovers without having
to worry about being held liable if workers put money into a
401(k) that should not be there. So more employers may start
allowing these deposits.
Furthermore, a reverse rollover can help high earners
maximize their after-tax retirement savings and income because
of the way it works with the latest rules governing Roth IRAs.
Here are some pros and cons, and pointers on how to decide
whether the reverse rollover is a trick you want to do.
You may get better investments, cheaper. If you work for a
large company, there is a good chance that it has put some
effort into making sure you have state-of-the-art investment
choices. You probably have separately managed accounts within
your 401(k). They are portfolios of investments created for your
plan that cost less than mutual funds.
Even in mid-sized plans, you should have carefully curated
low-cost mutual funds. The plan may even offer free advice on
how to split up and invest your money.
If that is the case, compare it with what you are doing on
your own. If you are paying more than 1 percent of your assets
in advisory fees and then also paying 1 percent or more in
mutual fund fees, that is an argument for rolling over into the
401(k). If, instead, you are already holding your IRA in
low-cost funds and individual stocks and bonds, you may not want
to go to the 401(k).
You typically cannot take money out of an IRA penalty-free
until you are 59-1/2. But you can take withdrawals from a 401(k)
once you are 55 and have separated from your employer.
Planning an early exit? Move money to the 401(k) so you can
get to it earlier.
If you want to pull your money out (albeit with penalties
and not usually a good decision), you have more leeway to do
that with an IRA than with a 401(k) plan, although the latter
allows hardship withdrawals. The investment menu in the 401(k)
is much smaller than the great big world of Wall Street that you
can buy through any brokerage IRA. These are IRA expert Ed
Slott's main objections to the reverse rollover.
High earners can use this tactic, which is complex, so bear
Roth IRAs are prized, because all of the money they earn is
tax-free forever if it is used in retirement, once the initial
contributions are made with after-tax money. But there are
income limits on who can contribute to a Roth. If you make more
than $129,000 as a single person or $191,000 as a couple filing
a joint tax return, you cannot contribute to a Roth.
The back way around that is to contribute every year to a
traditional tax-deferred IRA and then convert that IRA to a
Roth, paying taxes on the converted amount that has not yet been
taxed. The maximum contribution for any type of IRA is $5,500
(plus an extra $1,000 if you are over 50).
But there is a problem with that too: If you have older
IRAs, you have to pro-rate the amount you convert among all of
your IRA money and not just pull from your latest contribution.
That could result in a sizeable tax bill, as the older IRA money
has probably accumulated untaxed earnings that will have to be
taxed as they are moved to the Roth.
Here is where the reverse rollover helps: You can move all
of your old IRA money into your 401(k). From then on, do the
contribute-to-traditional-IRA-and-convert-to-Roth move. In that
way, there will not be any old tax-deferred IRA money to which
you will have to allocate a portion of your Roth conversion.
"From a tax standpoint, it's a very nice opportunity," says
Bill McClain, an actuary and retirement plan specialist at
consulting firm Mercer.
Bottom line? If you are a high-earning couple over 50 and
you both do this, it will enable you to put $13,000 a year into
Roth accounts while paying little, if any, extra tax.
And that, says McClain, may entice more senior employees to
ask their employers for those reverse rollover opportunities.
(Editing by Lisa Von Ahn)