Can You Move Money From an IRA to a 401(k)?

Moving retirement savings between different account types can be a strategic financial decision. While transferring funds from an employer-sponsored 401(k) to an Individual Retirement Account (IRA) is common, the reverse process, often called a “reverse” or “inbound” rollover, is an option. This rollover allows consolidation of assets or leveraging of 401(k) features. Understanding this transfer is important. This article covers the motivations, requirements, steps, and tax considerations for moving funds from an IRA to a 401(k).

Motivations for an IRA to 401(k) Rollover

Advantages of moving IRA funds into a 401(k) plan include:

Enhanced creditor protection: Employer-sponsored 401(k) plans receive robust protection under the Employee Retirement Income Security Act of 1974 (ERISA). This federal law shields assets from creditors in bankruptcy and other legal judgments, offering greater safeguard than IRAs, where protection varies by state law.
Backdoor Roth strategy: High-income earners, phased out of direct Roth IRA contributions, often convert pre-tax IRA funds to Roth IRAs. The IRS’s pro-rata rule considers all pre-tax and after-tax IRA funds when calculating the taxable portion of a Roth conversion. Moving pre-tax IRA balances into a 401(k) can reduce or eliminate the pre-tax IRA balance, making subsequent Roth conversions of after-tax IRA contributions tax-free.
Access to 401(k) plan features: Like the ability to take a loan, a feature not available with IRAs. While borrowing carries risks, it provides funds for unexpected expenses without early withdrawal penalties, if loan terms are met. This offers flexibility IRAs do not.
Consolidation: Consolidating retirement savings into a single employer-sponsored plan simplifies financial management. Managing fewer accounts streamlines investment decisions, record-keeping, and financial oversight. While 401(k) plans have higher annual contribution limits than IRAs, this rollover addresses existing IRA funds, not new contributions. Higher 401(k) limits may align with a broader retirement savings strategy.

Key Eligibility Requirements

Eligibility requirements for an IRA to 401(k) rollover include:

Plan acceptance: The employer’s 401(k) plan must permit inbound rollovers from IRAs. Not all plans offer this; verify by reviewing the plan’s summary description or contacting the administrator for guidelines and forms.
Pre-tax funds: Pre-tax (deductible) Traditional IRA contributions and earnings are eligible for a direct, tax-free rollover into a traditional 401(k). These funds maintain pre-tax status and are taxed upon retirement withdrawal. This is the most straightforward IRA asset to roll over.
After-tax funds: After-tax (nondeductible) Traditional IRA contributions can be rolled into an accepting 401(k), requiring careful tracking and reporting. Documentation, often IRS Form 8606, is necessary to establish the basis of these funds and prevent double taxation upon 401(k) withdrawal. The plan must track these after-tax contributions separately from pre-tax amounts.
Roth IRA funds and employment: Roth IRA funds are ineligible for rollover into a traditional 401(k) due to their tax-free withdrawal status. A Roth IRA can only be rolled into a designated Roth 401(k), with conditions like meeting the five-year rule for qualified distributions. Most 401(k) plans are traditional, limiting this option. The individual must be employed by the company sponsoring the 401(k) plan and actively participating to initiate an inbound rollover.

Executing the Rollover Process

Executing an IRA to 401(k) rollover involves these steps once eligibility is confirmed:

Contact 401(k) Administrator: Inquire about the inbound rollover process. The administrator confirms acceptance, provides forms, and details information required from the IRA custodian.
Provide IRA Details: The 401(k) administrator requests IRA details (custodian’s name, account number, rollover amount). They may provide forms for you and the IRA custodian to complete, ensuring correct categorization.
Contact IRA Custodian: After gathering 401(k) forms, contact the IRA custodian. Clearly state your intention for a direct, trustee-to-trustee transfer to avoid tax implications. The IRA custodian typically issues a check payable directly to the 401(k) plan.
Direct Rollover (Recommended): Funds transfer directly from the IRA custodian to the 401(k) plan administrator via check or electronic transfer. This avoids tax withholding and the 60-day deadline risk, as funds never pass through your control.
Indirect Rollover (Less Advisable): Funds are distributed directly to you. You have 60 days from receipt to deposit funds into the 401(k). The IRA custodian typically withholds 20% federal income tax, which you must make up. Failure to deposit the full amount within 60 days results in a taxable withdrawal, subject to income tax and a 10% early withdrawal penalty if under 59.5.

Understanding the Tax Implications

Tax-Free Direct Rollovers

A direct rollover of pre-tax IRA funds into a traditional 401(k) plan is tax-free. The IRS views this as a transfer between qualified retirement accounts, so no income tax is due. This tax-free treatment is why direct rollovers are recommended over indirect rollovers.

After-Tax Contributions and Pro-Rata Rule

Handling after-tax (nondeductible) contributions within an IRA during a rollover requires careful attention to avoid double taxation. If an IRA contains both pre-tax and after-tax contributions, rolling over only a portion or into a plan that cannot track after-tax amounts can trigger the “pro-rata” rule for remaining IRA funds, which dictates that each dollar withdrawn or converted is considered proportionally pre-tax and after-tax. Account for after-tax contributions using IRS Form 8606 to track their basis. When rolling over after-tax contributions into an accepting 401(k), the administrator must segregate these funds to prevent double taxation. This segregation maintains the tax-free status of original after-tax contributions.

Reporting Rollovers

For reporting, the IRA custodian issues Form 1099-R for the rollover year. This form indicates the gross distribution from the IRA. On the tax return, report this distribution as a rollover, making it a non-taxable event. The coding on Form 1099-R and tax return reporting confirm funds were rolled over and are not subject to current taxation.

Tax Pitfalls

Tax pitfalls can arise from rollover missteps. Missing the 60-day deadline for an indirect rollover makes the distribution taxable income, subject to ordinary income tax and a 10% early withdrawal penalty if under 59.5. Incorrectly rolling Roth IRA funds into a traditional 401(k) can lead to unexpected taxable income or penalties. Failing to account for after-tax basis via Form 8606 or not ensuring the 401(k) tracks these amounts can result in double taxation.

Citations

1. U.S. Department of Labor. “Employee Retirement Income Security Act (ERISA).”
2. Internal Revenue Service. “Retirement Plans FAQs regarding IRAs – Distributions (Rollovers).”
3. Cornell Law School. “29 U.S. Code § 1056 – Requirements for vesting and nonforfeitability of benefits.”
4. Internal Revenue Service. “Form 8606, Nondeductible IRAs.”
5. Internal Revenue Service. “Topic No. 413 Rollovers of Retirement Plan Distributions.”