Consolidating your retirement assets can simplify your nest egg. Having all your investments in one place is appealing due to the convenience of managing and monitoring the funds. You can execute a reverse rollover by transferring money from your individual retirement account, or IRA, into your 401(k), if your employer-sponsored plan allows it. This can enable you to leverage opportunities to save money in your employer-sponsored 401(k) plan that are not available in the IRA. The rollover won't count as a contribution.
Basis for Reverse Rollover
A reverse rollover can be advantageous for you for several reasons. Unlike traditional IRAs that are vulnerable in many states, funds in your company's 401(k) plan will typically be protected by federal law from creditors and judgments. Furthermore, with a 401(k), you can often borrow up to half of your savings, but you can't borrow from a traditional IRA -- you can only take withdrawals, which often incur a penalty if drawn before you turn 59 1/2 years old. Guidance in choosing and managing your investments is part of the 401(k) plan, but with an IRA, you either must hire an adviser or manage the money on your own.
Contact your account administrator at your workplace to establish that the 401(k) plan allows such a transfer. Establish whether the 401(k) plan is a worthy receptacle for your IRA assets based on investment options and fees. Request a total distribution of your IRA from the institution that holds it. The entire distribution amount should then be redeposited into your 401(k) account within 60 days to avoid any penalties or taxes.
Rolling your IRA into your employer's 401(k) will typically not result in a taxable event because you're essentially transferring tax-deferred contributions and earnings. When filing your return, you'll need to report the rollover. You'll find the total distribution amount in Box 1 of the 1099-R you get from the financial institution that held your IRA. You'll then report this amount on Form 1040 or 1040A in the field labeled "IRA Distributions."
Rollover With Withheld Taxes
If your financial institution mailed the rollover check to you first instead of directly to the 401(k) plan, 20 percent of the funds will be withheld and remitted to the IRS to cover taxes. You'll have to come up with additional funds to cover the 20 percent to avoid an early withdrawal penalty. Come tax time, the 20 percent income tax withheld will be indicated in Box 4 on Form 1099-B. The amount should be entered on Form 1040 or 1040A, in the line labeled 'Federal Income Tax Withheld'. Attach Form 1099-B when filing your return.
Dr Jack Gordon, the Chief Technology Officer at Strontium Logistics, is a 20-year veteran of the engineering and marketing business who favors stiff drinks, good debates and developing innovative digital marketing strategies to help companies grow.