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Roll Your IRA into a Qualified Plan

Although the IRS has allowed for tax-free rollovers from one IRA to another or from a qualified plan to an IRA for years, the Economic Growth and Tax Relief Reconciliation Act of 2001 added a new provision: a direct rollover from a self-directed IRA into a qualified plan. This new directive has created several opportunities for IRA holders in certain situations.

Perhaps the main advantage that this provision has created applies to qualified plan participants who have IRA accounts that are partially funded with after-tax contributions. In the event that a distribution must be taken, the IRS will prorate each distribution according to the ratio of pre-tax versus after-tax contributions. For example, if you have $200,000 in an IRA, and $50,000 of its value consists of after-tax contributions, then 25% of each distribution that you take will be taken from the after-tax contributions. The balance will be considered to come from the pre-tax contributions and is thus taxed as ordinary income. This means that if you were forced to withdraw $50,000 from your IRA for any reason, $37,500 of the withdrawal would be fully taxable. However, the new rollover rules under the EGTRRA provision give you a much better option. You could instead roll over $150,000 from your IRA into your qualified plan and simply withdraw the balance from your IRA. The entire balance will be considered a tax-free return of principal. Rolling the taxable portion of your IRA into your qualified plan will effectively allow you to escape the partial taxation of your withdrawal. (Of course, in order to take advantage of this provision, you must be a current qualified plan participant.)

This rollover provision also allows for greater liquidity from your IRA without taking any kind of distribution at all. If your qualified plan permits you to take out a loan against the balance of the plan, then rolling your IRA into the plan will increase the amount that you can borrow, generally by half of the amount that is rolled in. Therefore if you roll $100,000 from your IRA into your plan, then you will be able to borrow $50,000 more out of your plan (such ratios may vary from one plan to another.)

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