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Retirement Planning > Saving for Retirement

Ed Slott, Ian Berger Explain 2 Good Reasons to Do a Reverse Rollover

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What You Need to Know

  • Rolling from an IRA to a 401(k) can help clients avoid getting ensnared by the pro rata rule when doing a backdoor Roth conversion.
  • Clients who work past age 72 may be able to delay RMDs from their 401(k) until they leave their job.
  • Not all workplace retirement plans allow reverse rollovers.

Doing a reverse rollover — in which money is rolled from an IRA to a 401(k) — still makes sense for clients that want to take advantage of a “backdoor” Roth IRA conversion or delay required minimum distributions, according to Ed Slott and Ian Berger of Ed Slott and Co.

As it stands now, the backdoor Roth remains intact.

President Joe Biden’s Build Back Better package, which would have eliminated backdoor Roths, is all but dead, Berger, an IRA analyst at Ed Slott and Co., told ThinkAdvisor in a recent interview. Also, killing backdoor Roths hasn’t been floated in any bill that’s anticipated to be part of Secure Act 2.0 — at least not yet.

If Build Back Better is ”not dead, it’s pretty close to being dead,” Berger said. “If it’s resurrected, we don’t know if [eliminating backdoor Roths] would be part of it.”

“I can think of a few reasons” someone would do a reverse rollover, Slott added during the interview.

However, it’s important to note that first, a client “would have to have a company plan that allows the rollover” from an IRA to a 401(k), Slott said.

If they do, “maybe they want to get more money into their 401(k) — maybe they like the investments, maybe they like the creditor protection [in a 401(k)], maybe they do it to avoid RMDs because if you’re working in a company you can roll that money in and delay RMDs if you’re working past 72,” Slott said.

Backdoor Roths: Dodging the Pro Rata Rule

One benefit of a reverse rollover “is that when IRA funds are rolled back to a company plan only pretax funds can be moved to the plan,” Slott explained. “That can help people who have some after-tax funds in their IRA. If the pretax funds are rolled over to a 401(k), then that would leave only after-tax funds in the IRA and at that point they can be converted to a Roth IRA tax free. This is where a reverse rollover could lower or eliminate the tax bill on backdoor Roth conversion (which is still allowed under current law).”

Taxes on Roth conversions are assessed on a pro rata basis, Berger explains in a recent blog post.

“The pro-rata rule looks at all of your non-Roth IRA accounts (including SEP and SIMPLE IRAs) as of December 31 of the year of the conversion. If you have any pre-tax funds as of that date, a portion of your conversion will be taxable,” Berger explains. “But if you have rolled over your pre-tax IRAs to a 401(k) during that year, you’ll be left with only after-tax funds as of December 31, and the conversion will be potentially tax-free. And, you still can ‘reverse the reverse rollover,’ by rolling the 401(k) funds back to the IRA in the next year.”

Delaying RMDs

As to avoiding RMDs, “if you work past your ‘required beginning date’ for RMDs (April 1 after the year you turn 72), RMDs may not be required from your 401(k) until you leave your job,” Berger writes.

This is known as ”the so-called ‘still working’ exception, which allows RMDs to be delayed until retirement,” Slott added.

RMD deferral “is not available to IRAs,” Slott said. “But it’s also a double-edged sword. Yes, you can delay RMDs but they don’t go away. At some point, either at retirement or death, these funds must be withdrawn and taxed. The tax bill on those extra years of accumulation might be hefty. You might save some taxes up front by delaying RMDs, but it can cost you later, unless you are in a lower bracket at that point. Also, this deferral only applies to the company plan of the company you are still working for. It does not apply to other plans and it never applies to IRAs.”

Berger also notes that “depending on your state’s laws, your retirement savings may be better protected from creditors while in a 401(k) rather than in an IRA,” and “administrative and investment 401(k) fees can be lower than IRA fees.”

IRAs, Slott added, “are protected under federal law only in bankruptcy, but not other judgments.”


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