Society of Certified Senior Advisors: Can You Roll Over Your IRA to Avoid Tax?

A little-known provision often allows those working past 72 to delay required minimum distributions.

More and more Americans are working later in life, either because they have to or choose to do so. Perhaps you would like a little extra pocket money. Maybe you just got bored with retirement, or missed the intellectual and social stimulation of being on the job. Or it could be that you find Social Security doesn’t stretch as far as you thought it would. Whatever the reason for being employed, you may benefit from rolling your traditional individual retirement account (IRA) into your employer’s 401(k) to delay required minimum distributions (RMDs).

The information below is not intended as tax or retirement fund advice. Please speak to a professional advisor before taking any action with money in a retirement plan. He or she may have a different or better strategy for your particular situation.

How to Roll Over Your IRA

When you are playing with money the IRS is interested in, you have to play by the rules. There are strict provisions governing how you can roll over an IRA to another account, and you want to make sure and follow them. If your IRA is at a custodial firm (such as a brokerage), people there should be able to help you. Ideally, the transfer can be made directly over to the new plan and you will not have to touch the money or have your name on the check.

That said, here are the five steps for a rollover:

Decide which account the money is going to.
Make sure the account is set up to accept your funds.
Contact the institution that is holding your funds.
Confirm the procedure to transfer the money.
Remember you only have 60 days to complete the transfer.

For a more complete transfer explanation, go here.

Required Minimum Distributions

Normally, when you turn 72 (prior to 2020, the age was 70.5) you are required to take RMDs from your traditional IRA or face stiff penalties from Uncle Sam. But if you are working at that age and there is a 401(k) plan available, you can likely put off those withdrawals. Most plans allow you to roll over your traditional IRA (you have already paid taxes on a Roth IRA so they are not subject to RMDs) into the 401(k). Be sure to check if your plan allows a rollover.

You may wonder how much required distributions will be. There is a somewhat complicated formula for determining the amount, but it is easy to use an RMD calculator to figure out what yours will be. The calculator works even if you are not retired yet, and it displays numbers for even the longest-lived among us.

The government has waited years, or often decades, while money that you invested tax-free has accumulated in a traditional IRA. To boost your retirement nest egg, the IRS looks the other way while your money gathers dividends, interest, capital gains and the like. Nice! But the downside is that later on the government expects to get a payoff in the form of ordinary taxes. And woe unto you if you don’t pay up!

Miss an RMD and the government will remind you the penalty is an extra 50% on that shortfall. Maybe you forgot to take it in time, or you got the math wrong, or perhaps you took your RMD out of your spouse’s account. It is a big hit. However, if it is an honest mistake and you move to correct it immediately, the IRS may smile down on you and waive the fee. Read this tutorial and file form 5329.

Delaying RMDs

The IRS allows those with 401(k) and other qualified retirement plans such as a 403(b) or 457 to put off RMDs while they are working. If you do not need the full RMD amount for expenses, this allows you to delay taking funds out of a tax-advantaged account and paying taxes on that money as regular income. You can also roll the money back into an IRA later on if you would like.

It can also be a sweet deal for those who want to do a mega backdoor Roth IRA conversion as well. You may be able to avoid complexities and potential tax events by eliminating any money in a traditional, SIMPLE or SEP IRA before converting. Go here to learn more about this strategy to pay tax on your retirement funds once and then never again.

One caveat to remember is that you should evaluate the expenses in your 401(k) plan offerings. Some 401(k) investments may be so expensive that the benefit of avoiding tax may be nullified or even present a better alternative. It is essential to have a competent professional review your plan to make sure you are following the best alternative.

Finally, if you own at least 5% of the company that you are working for, you will not be able to roll your money into the 401(k) plan. That is just what the IRS says.