Rolling Over an IRA to a 401(k) Plan
If your 401(k) plan permits, you can roll over balances from a traditional individual retirement account (IRA), but not a Roth IRA, to a 401(k) plan. To qualify as a tax-free rollover, the balance must be rolled over to a 401(k) plan for the same person who owns the IRA, the balance must be rolled over within 60 days, and the maximum amount rolled over cannot exceed amounts that would be includible in gross income if not rolled over. Thus, contributions to nondeductible IRAs cannot be rolled over, but contributions to deductible IRAs and all earnings in both types of IRAs can be rolled over. Also, any required minimum distributions for the year cannot be rolled over.
Why would you want to roll over these balances to a 401(k) plan? By doing so, you can utilize one of these strategies:
• After rollover, you could withdraw any remaining funds in your traditional IRA free of taxes or penalties, since only nondeductible contributions would be left in the IRA. If you withdrew funds before the rollover, a pro-rata share of the withdrawal would be subject to income taxes and possibly the 10% federal tax penalty.
• If your income is under $100,000 in 2009, you could convert the remaining funds in your traditional IRA to a Roth IRA with no tax cost. Again, since the IRA only contains nondeductible contributions, there would be no income taxes associated with the conversion. Also keep in mind that starting in 2010, there will be no income limitation for Roth IRA conversions.
• Once the funds are rolled over to the 401(k) plan, you could withdraw the funds without penalty at age 55 if your employment is terminated, rather than waiting until age 59 1/2 to withdraw the funds without penalty from the IRA. If permitted by the 401(k) plan, loans can also be taken to gain access to the funds.
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