Money Girl explains what a reverse rollover is, who should consider one, and the 10 main pros and cons to keep in mind before pulling the trigger
Pro #2: Getting Earlier Withdrawals
If you’re thinking about early retirement, you may be able to get your money out of a workplace plan sooner, with no tax liability, than out of an IRA.
If you’re still working at age 70½, you don’t have to take minimum distributions from your 401k or 403b until you actually retire. So doing a reverse rollover gives you advantages if you want to retire early, or retire late.
Some workplace plans allow you to take penalty-free withdrawals at age 55, instead of having to wait until the official retirement age of 59½. But you have to keep your money in your former employer’s plan to do that.
On the other hand, with an IRA, you can never take penalty-free withdrawals until reaching age 59½.
Pro #3: Retiring Later
But what if you love working for your employer and have no plans to retire early? With a traditional IRA you must begin taking withdrawals and paying tax on required minimum distributions at age 70½, no matter what.
But that’s not the case with a workplace plan. If you’re still working at age 70½, you don’t have to take minimum distributions from your 401k or 403b until you actually retire. So doing a reverse rollover gives you advantages if you want to retire early, or retire late.
Pro #4: Getting Loans
Workplace retirement plans are not required to offer loans to participants, but many do. This is not the case with an IRA, because loans are never allowed.
With a workplace retirement loan, you can typically borrow 50% of your vested account balance, up to $50,000, without paying an early withdrawal penalty (if you’re younger than age 59½.)
However, you still have to pay interest on a loan from your 401k or 403b, which gets added to your account balance. The loan plus interest must generally be repaid within 5 years, or any outstanding balance will be considered an early withdrawal.
See also: Should You Take a 401k Loan?.
Pro #5: More Protection from Creditors
Qualified workplace retirement plans get some nice federal protections that don’t apply to IRAs, thanks to the Employee Retirement Income Security Act of 1974 (ERISA). This law keeps your 401k (and in some cases your 403b) safe from creditors, even if you declare bankruptcy.
There are some protections for IRAs; however, they vary from state to state. For instance, a creditor may be able to seize your IRA depending on your financial situation, and how much is in the account.
5 Cons of Doing a Reverse Rollover
Now let’s cover some disadvantages of doing a reverse rollover. Here are 5 main cons that may tip the scales in favor of leaving your money in an IRA, instead of moving it into a workplace plan: