Reverse Rollovers

In a previous article, we provided info on the Backdoor IRA, which is a technique to help higher earners contribute to Roth IRA’s. In this article, we referenced a way to get around the one limitation with Backdoor IRA’s…..

​Backdoor IRA’s open up Roth contributions to higher earners by allowing contributions in a roundabout way. However, as mentioned in our previous article on this, the presence of existing Traditional IRA’s can significantly limit the benefit of a Backdoor IRA.
 
Enter the Reverse Rollover
Since Roth conversions with pre-existing Traditional IRA accounts in place activates the “Pro Rata” clause, you can exercise a Reverse Rollover to avoid this Pro Rata clause from crushing your Roth IRA dreams!
 
You’re likely familiar with a Direct IRA Rollover which is common for folks leaving a job. It occurs when you rollover your 401k funds into a Traditional IRA. No tax implications are incurred and you now gain more control over the funds. On the other hand, a Reverse Rollover involves moving funds from a Traditional IRA account into a 401k.
 
This opens up the Backdoor IRA since you would no longer have pre-tax funds in your IRA upon conversion.
 
Other Benefits of Reverse Rollovers

• Bankruptcy protection: 401k accounts are not considered part of your bankruptcy estate. IRA accounts are included, but are currently exempted up to $1.2mm
• Early access: 401k’s can be accessed at age 55 if account holders leave their job, but IRA accounts are stuck until age 59
• Loan availability: 401k loans can be obtained without tax implications. This isn’t so with IRA’s.
• Delayed distributions: folks still working can delay 401k withdrawals beyond the 70 ½ required distribution age, whereas Traditional IRA’s must begin RMD’s (required minimum distributions) at age 70 1/2.

 
Drawbacks

• Limits on education & home purchase distributions: IRA’s allow for up to $10,000 to be accessed penalty free for these purposes; while 401k’s limit penalty-free distributions to medical & funeral expenses
• Fewer options for investments: 401k’s are limited to employer fund options; whereas IRA’s allow for expansive investment choices

Remember, if you’re going to execute a Reverse Rollover, be sure it is done with a direct rollover, so your IRA administrator doesn’t cut you a check for the transfer, which then carries a tax withholding requirement.
 
As you can see, the Reverse Rollover may be a vital strategy to your financial plan.
 
Contact us if you have any questions on how this technique can be used for you!