Rolling Your IRA into a 401(k) – to Avoid RMD

Photo credit: jb

In another article I pointed out a few additional reasons that might make you want to rollover your old 401(k) plan into an IRA – but there are also good reasons, in particular circumstances, that it might make sense to move your IRA funds into a 401(k) plan. One of those reasons might be to avoid having to take Required Minimum Distributions (RMDs) if you’re over age 72 and are still working.

Rolling IRA Money into a 401(k) to Avoid RMD

This is a somewhat narrow slice of folks, but as the population and workforce ages, there are bound to be people that this will be available to. Here’s how it works:

If you are age 72 or older (it used to be 70½) and you have an IRA, you will be required to take a distribution from your IRA each year. However, if you are still working and have a 401(k) plan available to you, you can avoid having to take these RMDs from the 401(k) until the year that you retire. If your 401(k) plan allows it (and today most plans do), you can rollover your existing IRA account into your 401(k) plan.

This is possible because 401(k) plans (and other Qualified Retirement Plans such as a 403(b) or a 457) don’t require you to start RMDs while you are still working, even if you’re over age 72.

So, if you don’t need the RMDs to live off of, you can eliminate the requirement by rolling over those funds into your 401(k) plan – and then begin taking RMDs upon your retirement. At that point you can also roll the funds back into an IRA as you see fit.

Of course, this shouldn’t be the only factor that you consider – you should also look at the inherent costs in your 401(k) plan, along with your investment choices and any plan-specific issues that may cause a problem for you with the rollover. In general though, this is a pretty good move for folks who happen to fit the criteria.

One last thing – if you happen to own the company that you work for (or own at least 5% or more of it), you can’t roll your IRA money into that company’s 401(k) plan to avoid RMDs. It’s just one of those IRS things… You only get to avoid RMDs if you’re not a 5% or more owner.