What Is a Reverse Rollover?

A reverse rollover is when you roll funds from an individual retirement account (IRA) into a 401k or other workplace retirement account. But before you can initiate a rollover — you first need to check with your 401k plan administrator to make sure they allow reverse rollovers.

Trending Now: Suze Orman’s Secret to a Wealthy Retirement–Have You Made This Money Move?

How to Complete a Reverse Rollover

Here’s the steps you need to take to complete a reverse rollover into your 401k:

1. Determine pre-tax vs. after-tax: You can only rollover pre-tax IRA balances. You’ll need to know the amount of all combined IRAs are pre-tax and are eligible to be rolled over. You may need to work with a qualified tax professional to determine the amount eligible.

2. Initiate rollover with 401k plan administrator: Once you know how much you can rollover from each IRA you own, you will need to contact your 401k plan administrator to initiate the rollover. This may include providing them your IRA account information and signing documents to approve the rollover.

3. Invest rolled over funds: Once the rollover is completed, you’ll want to choose your investments within your 401k account. You’ll only be able to select from the available investments within your plan.

4. Complete a Roth IRA rollover (optional): Once you only have After-tax balances left in your IRA, you can successfully complete a Roth IRA conversion without any tax implications. This is one of the benefits of reverse rollovers.

When Should You Consider a Reverse Rollover?

Here are a few Scenarios where a reverse rollover might be beneficial:

• Consolidating retirement accounts: If you have many IRAs, rollover IRAs, or other retirement accounts and want to simplify, a reverse rollover allows you to hold your entire retirement balance in a single account.

• To enable Roth rollovers: If you have a mix of pre-tax and after-tax contributions in your IRA, Roth IRA rollovers may end up being a taxable event. To protect yourself from being taxed on a portion of your rollovers, a reverse rollover of the pre-tax portion of your IRAs into a 401k makes your remaining IRA balances entirely after-tax. This allows you to roll money into a Roth IRA tax-free.

• Avoiding Required Minimum Distributions (RMDs): Required Minimum Distributions (RMDs) are enforced by the IRS once your turn age 73 (or age 75 if born 1960 or later). If you want to enjoy prolonged tax-free growth and are still working, a reverse rollover into your 401k account may allow you to avoid RMDs until you stop working.

• Protecting assets from creditors: In general, a 401k account has more protections from creditors than an IRA, depending on the state you live in.

Benefits of a Reverse Rollover

Reverse rollovers are a very specific type of investing strategy, but can have a big impact in your overall investment and tax planning for the future. Here are a few benefits of a reverse rollover to consider:

• Tax Advantages: Defer taxes by moving funds back into a 401k account, allowing a backdoor Roth conversion without being subject to the pro-rata rule.

• Avoiding RMDs: RMDs mean you must withdraw a certain amount from your IRA by age 73 (or 75 if born 1960 or later). But a reverse rollover keeps funds in your 401k account, pushing RMDs out until you’re no longer employed.

• Creditor Protection: Employee-based retirement accounts (like a 401k) are federally protected from creditors — while individual retirement accounts are governed by each state. Some states allow creditors to garnish IRAs in some cases, so a reverse rollover can help protect your funds.

Drawbacks of a Reverse Rollover

A reverse rollover isn’t for everyone, and it might end up being a bad move for you. Here re a few drawbacks of a reverse rollover to consider:

• Limited investment options compared to an IRA: Most 401k plans have far less investment options than an IRA at a broker of your choice. This may mean less diversification and higher fees.

• Potential fees associated with 401k plans: Most 401k plans have a plan administrator fees, but the funds selected in the account may also have high fees. This can hurt your long-term investment returns.

• No all plans support them: Some 401k plan administrators may not support a reverse rollover.

Can You Do a Reverse Rollover Multiple Times?

Yes, you can! While the IRS states that you cannot rollover more than once from an IRA to another IRA within a 12-month time period — it doesn’t apply to IRA to 401k rollovers. So you can do this as many times as you want. But you’ll need to make sure you accurately report the rollover on your tax return, and that your 401k plan administrator allows multiple rollovers.

Reverse Rollover vs. Regular Rollover: What’s the Difference?

A reverse rollover is similar to a regular IRA rollover, but has a few notable differences. Here’s how a reverse rollover and a regular rollover compare:

Is a Reverse Rollover Right for You?

A reverse rollover can help you save on taxes, avoid RMDs and protect your assets from creditors. It can also help you unentangle pre-tax and after-tax IRA balances so you can perform a backdoor Roth IRA conversion — an advanced tax-saving retirement strategy.

But the process can be complicated, and it’s best to work with a licensed financial advisor and tax advisor to help you through the process.

FAQ

• What is a reverse rollover in simple terms?

  • A reverse rollover is when you transfer money from your IRA to your 401k account.

• Why would I want to do a reverse rollover?

  • A reverse rollover can help you save on taxes (through opening backdoor Roth conversions), avoid RMDs if you’re still working and protect your assets better than an IRA.

• Can I roll my IRA back into my 401k?

  • In some cases, yes. This is known as a reverse rollover and is only allowed if your 401k plan administrator allows it.

• Are there any penalties for doing a reverse rollover?

  • There are no penalties as long as you only rollover pre-tax IRA money into your 401k account. But your funds may become less accessible than an IRA until you leave your job.

• How long does it take to complete a reverse rollover?

  • A reverse rollover may take a few weeks, depending on your 401k plan administrator, your IRA broker and what steps are required to get approval for moving the funds over.

This article originally appeared on GOBankingRates.com: What Is a Reverse Rollover?