 | 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
Drawbacks
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!
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!