Reverse Rollovers: Investors May Have Been Doing IRA Rollovers Wrong All Along

NEW YORK (MainStreet) -- You work hard and build up a nice, fat 401(k). Then, as you get set for retirement, you roll it over to an IRA. That's the way it's done. But what if investors have been doing it wrong all along? What if you should roll your IRA into your 401(k)? It's called a reverse rollover. And it's a strategy most financial advisors are not familiar with, according to Michael A. Martin, a financial advisor with Legacy Financial Partners in West Palm Beach, Fla.

"One of the most beneficial things about a 401(k) versus an IRA is that if you are still working and over 70.5, you won't need to begin your Required Minimum Distributions if you don't need the income," Martin tells TheStreet. "For executives and high-income earners, this is a real benefit as many of them don't want to start drawing from these types of accounts and want to continue to defer the tax. With many people still working at this age -- or coming out of retirement to work -- it makes a lot of sense."

Martin says many of the people who can benefit from such a strategy are often small business owners, but there may be a hitch.

"Unfortunately this little-known tax-deferral strategy doesn't apply to them if they have more than 5% ownership in the sponsoring company," Martin adds.

But for the rest of us, a reverse rollover may offer some other benefits as well.

"If you leave your employer in or after the year you turn 55, you can take withdrawals from your 401(k) prior to age 59.5 without the 10% early withdrawal penalty," says Ed Snyder, a Certified Financial Planner in Carmel, Ind. "If you are in a situation where you are retiring early, have a large IRA from a previous rollover and will need income from your investments, it makes sense to move the IRA to the 401(k) so that you can take penalty-free withdrawals."

Steven Brett, an independent financial advisor in Melville, N.Y., bullet points some additional reasons a reverse rollover might make sense:

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