Should I Put My IRAs Into My Company’s 401(k)?

If you have investments in one or more IRAs and are starting a new job with an employer that offers a 401(k) plan, an important question may well arise: Should you move your assets from your IRA into your new 401(k)?

Though the question is a logical one, it rarely arises because IRA rollovers generally move in the opposite direction, with investors transferring their 401(k) assets to an IRA when they leave a job or want to take advantage of the investment freedom an IRA offers. Nevertheless, there can be some good reasons to move your IRAs into your company’s 401(k). In this article, we’ll look at the pros and cons of this maneuver.

Understanding Reverse IRA Rollovers

Rolling the assets in an IRA account over into a 401(k) is sometimes referred to as a reverse rollover. That’s because it’s far more common, at least nowadays, to move assets in the opposite direction—from a 401(k) to an IRA. This often happens when an employee leaves a job or decides they would like more investment options than a strict corporate 401(k) offers. 

It’s certainly possible to move assets between other types of retirement accounts, though. However, it’s important to check if your employer’s 401(k) accepts this kind of incoming transfer. Some plans do, but others do not.  The IRS also provides guides as to what kinds of transfers are allowed and how to report them.

As this guidance states, you are only allowed one rollover in any 12-month period, and you must report any transaction when you submit your annual tax return for both direct and indirect rollovers. If you move assets out of your IRA to put them in your 401(k) or use them for another purpose, your IRA brokerage will send you a Form 1099-R that will show how much money you took out. On your 1040 tax return, report the amount on the line labeled IRA Distributions. The taxable Amount you record should be $0. Select “rollover.“

Though this maneuver is unusual, it can have advantages in some circumstances. 

Advantages of Rolling an IRA Over Into a 401(k)

There are a number of reasons why you would want to move IRA assets into your 401(k):

• Earlier access to your money. IRAs and 401(k) plans have different age limits for when you can take distributions. You can typically start using the money in a 401(k) at age 55 but will have to wait until you are 59½ to access the money in your IRA. If you plan on retiring early, this five-year difference could be important.
• Lower costs. Most 401(k) plans have administrative and other costs that make their expense ratios higher than those of regular IRAs. However, some 401(k) plans—particularly those at large companies with many participants—might actually be lower in cost than your IRA is. This is especially true if you use managed options like target-date funds. Some 401(k) providers may also give you access to free financial advice.
• Protection against creditors. The assets held in 401(k) plans are more protected against creditors than those held in IRAs. IRAs are protected in bankruptcy up to a certain amount, but 401(k) plans have no such limits.
• You can postpone minimum distributions. Just as a 401(k) allows you to take distributions earlier than an IRA, it may also allow you to defer taking distributions. The IRS may require you to start taking money out of pretax retirement accounts like IRAs when you reach 70, but you can defer these distributions from a 401(k) as long as you are still working.
• Take out 401(k) loans. Borrowing from your 401(k) should be a last resort, but if you are really stuck for cash, it’s important to recognize that some 401(k) plans allow loans. Loans are not permitted for IRA-based plans, so moving your assets into your 401(k) might make them more accessible in an emergency.
  

Disadvantages of Rolling an IRA Over Into a 401(k)

As with every investment decision, there are also some potential drawbacks to moving your IRA assets into a 401(k):

Limited investment options. One of the advantages of an IRA is that you can invest in nearly everything. But 401(k) accounts, in contrast, are often much more limited. Some company 401(k) accounts only allow you to invest in a few mutual funds, for instance, or encourage you to invest in company stock.

In certain circumstances, it can be easier to access IRA funds than those held in a 401(k). Though IRAs don’t allow you to take out emergency loans, there are some loopholes that allow early distributions without penalty (but with taxes still owed) for higher education expenses and a first-time home purchase (with a limit of $10,000).

Low-cost investment advice. If your 401(k) plan doesn’t come with investment advice and you want help with that, many IRAs offer help with investment selection—as long as you don’t mind working with a robo-advisor. A financial advisor can also help you manage investments in a 401(k), of course, but this could be of limited use considering the small, curated investment selection that's typical of a 401(k).

The Bottom Line

If you are starting a new job with an employer that offers a 401(k) plan, you might be wondering if you can move investments from your IRAs into your new plan. Though unusual, this can offer some advantages if you want to access your retirement funds early or defer distributions until you retire. The disadvantage of doing this is that most 401(k) plans have far more limited investment options than IRAs do.