By Lowell M. Smith
President, Inspira
Recently one of our advisor clients came to me with an interesting question: Could one of his accountholders roll funds from a Traditional IRA back into a 401(k) plan, even though contributions had been made to that IRA? As with most questions in the retirement plan world, the answer was, “It depends.”
Funds from a Traditional IRA can be rolled back into a 401(k) plan only if the plan document permits such a rollover. Assuming the plan does permit this type of reverse rollover, only pre-tax retirement plan contributions made to the IRA that were tax-deducted and earnings in the account can be rolled back into the new 401(k) plan.
Also, if there were after-tax contributions in the IRA, those earnings can move back into the 401(k) plan but an amount equal to the after-tax contributions must remain in the Traditional IRA.
For example, assume that “Amy” had directly rolled over $50,000 from a 401(k) plan into a Traditional IRA in 2005. In 2006, Amy made an additional IRA contribution of $4,000 that was deductible at the time because she did not have access to a retirement plan through her employer. In 2007, Amy made another $4,000 contribution to the IRA, but this time she could not deduct that contribution. In 2010, Amy started working at a company whose 401(k) plan permitted Traditional IRAs to be rolled into the plan. At that time, the value of the account had grown to $70,000. Amy would need to leave $4,000 in the IRA after transferring $66,000 to the 401(k) plan because the $4,000 was the amount of the non-deductible contribution made to the Traditional IRA.
As an additional strategy, assuming Amy has no other IRAs, she has the option of converting that $4,000 Traditional IRA into a Roth IRA for little, if any, tax consequence.
It is also important to note that it is the responsibility of the accountholder to keep track of the after-tax basis in an IRA account, not the financial institution holding the assets.
