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Your Finance: 'Reverse rollover' for retirement-minded

401(k) plans offer some benefits that individual IRAs

401(k) plans offer some benefits that individual IRAs do not. Photo Credit: iStock

It may sound like something you would train your dog to do, but the "reverse rollover" is a maneuver that more retirement-minded workers should try.

The move -- taking personal individual retirement account (IRA) assets and moving them into your company 401(k) plan -- sounds counterintuitive. Why would you do that once you have wrested your money from a former employer and rolled it over into your very own personally controlled account?

It turns out there are a few reasons. For starters, 401(k) plans offer some benefits that individual IRAs do not.

You can access your money penalty-free at a younger age if you retire early. The funds in your 401(k) have greater protection against legal judgments. And you may find the 401(k) offers a better investment package at lower costs than you can find on your own.

Earlier this month the U.S. Treasury Department and the Internal Revenue Service issued guidance making it easier for companies to accept reverse rollovers.

Here are some pros and cons, and pointers on how to decide whether the reverse rollover is a trick you want to do.

Possible bargains: You may get better investments, cheaper. If you work for a large company, there is a good chance that it has put some effort into making sure you have state-of-the-art investment choices. You probably have separately managed accounts within your 401(k).

They are portfolios of investments created for your plan that cost less than mutual funds.

Even in midsized plans, you should have carefully curated low-cost mutual funds. The plan may even offer free advice on how to split up and invest your money.

If that is the case, compare it with what you are doing on your own. If you are paying more than 1 percent of your assets in advisory fees and then also paying 1 percent or more in mutual fund fees, that is an argument for rolling over into the 401(k). If, instead, you are already holding your IRA in low-cost funds and individual stocks and bonds, you may not want to go to the 401(k).

Earlier withdrawals: You typically cannot take money out of an IRA penalty-free until you are 591/2. But you can take withdrawals from a 401(k) once you are 55 and have separated from your employer.

Planning an early exit? Move money to the 401(k) so you can get to it earlier.

Less control: On the other hand, the investment menu in the 401(k) is much smaller than the great big world of Wall Street that you can buy through any brokerage IRA. These are IRA expert Ed Slott's main objections to the reverse rollover.

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