With the increased usage of the Backdoor ROTH Conversion strategy, Reverse Rollovers are becoming more popular.
The Backdoor ROTH Conversion strategy allows higher earners (who earn too much to make direct contributions) to fund ROTH IRAs. However, for this strategy to be most effective the individual must not have an existing tax-deferred IRA.
Luckily, there are a few options that individuals can use to “get rid of” any pre-tax IRAs so that they can utilize the Backdoor Roth strategy without creating a taxable event. One option includes converting the full balance of any pre-tax IRAs so that after the conversion, all balances will be in ROTH. However, this could create a taxable event since ROTH Conversions of pre-tax dollars are considered taxable income.
A second option includes a Reverse Rollover, which means moving all pre-tax IRA balances to an Employer Plan. A Reverse Rollover allows you to “get rid of” your pre-tax IRAs without creating a taxable event.
When considering a Reverse Rollover, it is important to review your current plan rules (not all plans accept rollovers). In addition, only pre-tax funds can be rolled into the plan, so if your IRA is funded with both pre-tax and post-tax funds, you may not be able to roll the funds into the plan.
The Reverse Rollover has gained popularity as a result of the Backdoor ROTH Conversion Strategy. While it can be a good option for many, there are many small details to consider before making any big decisions that are sometimes irreversible.