Most people's first instinct is to roll their 401(k) assets into their IRA. However, assets can also go the other direction and do more for you than simply consolidate your nest egg in one place. Plus, because you're moving money from one tax-deferred retirement plan to another, you won't owe any taxes or penalties as a result of the transfer.
You're permitted to roll money only from a traditional IRA into a traditional 401(k) plan. You can't transfer from a Roth IRA or into a Roth 401(k). In addition, you're only permitted to make the transfer from your IRA to your 401(k) plan if your employer allows it. If your employer doesn't, you're out of luck. According to Reuters, as of 2014, about 69 percent of 401(k) plans accept IRA rollovers.
To have the money transferred from your IRA to your employer plan, ask your financial institution for a transfer form. Each financial institution has a slightly different form to request the transfer, but all will require your identifying information, the account information for your IRA and the account information for your 401(k) plan. After you submit the form, the money will be automatically transferred to your 401(k) plan. Alternatively, you can take a distribution from your IRA and, within 60 days, deposit it into your 401(k) plan.
Benefits of Transfer
Transferring your money from your IRA to your 401(k) plan can do more than just consolidate your various retirement assets. First, your employer might offer better investment options at a lower cost than you can access on your own. Second, 401(k) plans offer a few exceptions to the 10 percent early withdrawal penalty. For example, if you retire after turning 55, you can withdraw money without penalty even though you're under 59 1/2. Third, many 401(k) plans allow you to take a five-year loan without penalty. Finally, 401(k) plans offer better protections against your creditors seizing money from the plan.
Drawbacks of Transfer
Once your money is in the 401(k) plan, you're allowed to take money out only if you leave the company, you become disabled or, if the 401(k) plan permits, for certain financial hardships. With an IRA, you can access the money at any time even though you might still owe taxes and the 10 percent penalty. In addition, IRAs do have two early withdrawal penalty exceptions not available to 401(k) plans: higher education expenses and up to $10,000 for a first-time home purchase. For example, if you move your money from your IRA to a 401(k) and then take money out for higher education expenses, you will owe taxes and the 10 percent early withdrawal penalty.
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