IRA to 401K transfer?

[smileydog]

Well I think I have my ducks in a row but I thought I would run it by the brain trust here. I am 54 still working and plan on pulling the plug in about 6 months. With my current firm I have an amount in my 401k which I have been in for several year. I plan to bolster that amount from my IRA with enough funds that will balance out my tax sheltered money with my taxable funds. My plan admin approves of my transfer so I'm good there. If I leave my employer anytime next year (the year I turn 55) I can take full distribution of the funds. I know I will be taxed on the funds but my wages will be low if I leave employment. My company does not allow any payment plans - only lump sum of 401k funds upon leaving. Any gotchas that I need to be looking for? The IRS web site seems rather clear on the turning 55 in the year you separate from employment. I figure If I don't want to take it all in distribution I can roll some into my IRA.

The first of the year is fast approaching and I want to have everything pre-positioned.

[Sarah in SC]

So, let me try to understand:
you have x dollars in your 401k, and you want to add x dollars as a rollover from your IRA (so that you will qualify for the penalty free w/d from your 401k at 55 and separation of service). Right?
But then when you separate, you have to take a lump sum out of the 401k, and can't take payments, so you are going to take all/some (?) of it out as a taxable distribution and roll the rest back into your IRA?
I'm not sure exactly why you are putting dollars from the IRA into the 401k. Can you elaborate?

[smileydog]

I have enough pre-tax dollars to support a withdrawal in IRA. I need to have more in post tax - & I will be in low tax bracket for next year. I plan to take about a years worth of cash so that I can span the gap before 59.5. My thinking is If to transfer money over before (while I'm working) so that I can take it out when I leave the employer - unless I'm missing something. It gives me a way to take some funds out of IRA without a 5 year / 59.5 plan.

[Sarah in SC]

Okay, sorry, I just missed that in the first one. You'll be pulling the lump sum out, paying the ordinary income taxes on it, and then reinvesting in your taxable account (or using it for living expenses or rolling it back into an IRA--that is the only part I'm not as sure about--maybe ask Finance Dude or one of the CFAs about rules that limit rolling out and rolling between qualified plans for x years).

Yes, that looks fine, and it is a good 401k plan that you have that allows for such open rollovers like that. I'd still check with your tax preparer just to be sure, but you are correct as far I understand the distribution rules. Good to do when you expect to be in a lower income tax bracket, too.

[kaneohe]

Can't you get those funds you need from the 401K?

edit upon reread: do you mean that you want to make all of the 401K funds taxable and also more
funds from the IRA which you will transfer into the 401K? But you also are somewhat uncertain about
how much you want to make taxable because you are also considering rolling funds from the 401K
back into the IRA?? You need to make sure that you don't violate the >1 rollover/12 mos. rule
so direct transfers between trustees would be the safest route when possible. You used the term
transfer for the IRA to 401K move so perhaps that's what you had in mind already.

[smileydog]

To explain a bit. I took an early out package several years ago from a megacorp buyout. Took my money from that settlement and 401k and put in my IRA. I then went back to work for another company and started a new 401k. I know I can get all my funds out of funds penalty free that are in the 401k now if I leave the company the year I turn 55. I need to bolster that amount with a small direct rollin from my larger IRA (which is allowed by my current 401k plan) to give me enough to span the gap til 59.5.

I can always to a 72t but this seemed like a cleaner solution.

I can totally avoid the double rollover by not putting more in the 401k that I plan to take out. My tax guy thinks I'm ok if my plan allows the transfer - so I think I'm good.

I hope this works as it will get me out of the fray a bit earlier.

Thanks for your input!

[Coach]

smileydog, it's an interesting plan, and pretty clever. You hear about 401k to IRA all the time, but I think this is the first time I've heard of IRA to 401k.

I did find this one interesting reference: How To Transfer an IRA to a 401k, in case you haven't found it already.

One caution: that article seems to be saying that the transfer counts toward your annual 401k contribution limit.

Good luck! And congratulations on your imminent retirement!

Coach

[smileydog]

Thanks, I will check out that link.

[Martha]

See IRS publication 590, which has an extensive discussion of rollovers. This discussion says in part:

"IRA as a holding account (conduit IRA) for rollovers to other eligible plans. If you receive an eligible rollover distribution from your employer's plan, you can roll over part or all of it into one or more conduit IRAs. You can later roll over those assets into a new employer's plan. You can use a traditional IRA as a conduit IRA. You can roll over part or all of the conduit IRA to a qualified plan, even if you make regular contributions to it or add funds from sources other than your employer's plan. However, if you make regular contributions to the conduit IRA or add funds from other sources, the qualified plan into which you move funds will not be eligible for any optional tax treatment for which it might have otherwise qualified."

Publication 590 (2007), Individual Retirement Arrangements (IRAs)

It used to be that you would have had to rollover the first 401k into a special conduit IRA to be able to roll it back into a new 401k. I believe that is no longer the case. Talk to the new employer about your rollover options.

The rollover will NOT be counted as part of your yearly contribution limit.

[Martha]

Man, I keep forgetting to throw in my two cents worth on your main question. If you rollover the IRA into the 401k, yes it is true that you can take money out with no penalty if you retire from that particular job in the year you are 55 or after. However, IIRC there may be restrictions on withdrawal in the new company's plan and the plan may not allow you to take periodic distributions. You might also want to read:

401(k) Resource Guide - Plan Participants - General Distribution Rules
Publication 575 (2007), Pension and Annuity Income

[clifp]

IRA to 401K I do learn something everyday on the forum.

It seems to me that this is a simpler way of getting money you need to bridge that gap until you are 59.5. I am skeptical that is the most tax efficient way of doing so. It depends on the amount of money involved but I'd guess if you are taking about amounts much over $100K you are better of using a 72(t) and withdrawing the money annually paying the tax each year and maximizing the benefits of tax free compounding.

[smileydog]

clifp,

I agree with your 72t comment. It would be nice though to do one transaction and let the IRA continue to grow til 60. My backup plan would be to tap the IRA with 72t only if I had to.

Had a talk with the IRS yesterday (if you can trust the 800 #) as well as the IRA and 401k plan admins. They say no problem with the transfer in - and the subsequent distribution without penalty. Balancing the tax is my main question right now. I am trying to keep it as small as possible - I agree that much over $100k starts to hurt - a lot. I would like to keep in the 15% tax bracket if possible. I am using some Tax programs to see which would be better. I think my scenario count is up to about 12 now. I have found ESplanner to help in these scenarios for estimating taxes but my excel spreadsheet (growing very large now) is most helpful.

Thanks for the comments - I'm still cypherin (Jethro style...)

[statsman]

My wife's 401(k) allows the transfers of rollover IRAs (but not individually contributed IRAs). They maintain these assets under a different entry within the 401(k) separate from the employee and employer contributions, restricting their distribution until 59 1/2 (as if it were still in a rollover IRA).

We actually opted to do this for a small rollover IRA my wife had for company she worked a short time for. We decided it wasn't worth having the rollover IRA just to manage such a small amount, so we folded it into her current 401(k).

[tuixiu]

OT: statsman you wouldn't happen to be a Clippers fan who grew up around opera would you?

[statsman]

Quote:

Originally Posted by tiuxiu OT: statsman you wouldn't happen to be a Clippers fan who grew up around opera would you?

No, I was born and raised in the Central Valley and currently live in Silicon Valley. Oh yeah, I am a fan of the other mediocre franchise in the NBA's Pacific division.

[tuixiu]

Heh I meant opera as in vikings singing. You remind me of someone, was trying to pin down if it's you.