Eligible assets can be moved from an employer qualified retirement plan (QRP) to a traditional [including a simplified employee pension (SEP)], Savings Incentive Match Plan for Employees of Small Employers (SIMPLE), or Roth individual retirement account (IRA) and from a traditional (including SEP) or SIMPLE IRA to a QRP by way of direct or indirect rollover. Many financial organizations are familiar with the QRP-to-IRA rollover process as this type of transaction is quite common; however, IRA-to-QRP rollovers are less common. Only pre-tax IRA assets are eligible for rollover to a QRP. Another important point to consider by an IRA owner before visiting with his/her IRA custodian or trustee is to determine whether his/her employer’s QRP will accept IRA assets, something the QRP’s administrator should assist with. If an IRA-to-QRP rollover is allowed, a frequently asked question is “why would an IRA owner consider doing this in the first place?”
Reasons to move IRA assets to a QRP
The following are some reasons an individual might consider moving IRA assets to his/her QRP:
- The QRP has a loan provision allowing tax free access to the assets with a repayment plan. Loans cannot be taken from an IRA and an IRA cannot be used as collateral for a loan without the IRA owner incurring serious tax and penalty consequences.
- The QRP generally offers greater bankruptcy and other protections than are available if the assets are held in an IRA.
- The QRP generally offers lower investment costs. For example, annual fees for mutual fund shares within the QRP are lower due to the availability of share classes with lower fee structures. Annual fees for the same mutual fund shares in an IRA will generally be higher because the IRA owner can’t purchase the same share class.
- Required minimum distributions from a QRP may be delayed until after the age 72 for individuals still working at age 72 or older and are not a 5 percent or more owner of the company. Required minimum distributions from an IRA begin in the year the IRA owner attains 72, regardless of employment or ownership interests in a company.
A QRP may limit rollover of IRA assets to only those that are held in a “conduit IRA”, an IRA that exclusively holds assets that were previously rolled over from a QRP (i.e., no IRA regular contributions, transfers from other IRAs, etc., are held in the IRA). However, there is no law or IRS regulation preventing comingled traditional (including SEP) or SIMPLE IRA assets to be rolled over to a QRP.
Reporting IRA-to-employer plan rollovers
If completed as a direct payment to the QRP, an IRA custodian or trustee will report the IRA distribution using IRS code G on a Form 1099-R. If an IRA owner takes a distribution (i.e., a check is made payable to the IRA owner) and he/she is younger than age 59½, an IRA custodian/trustee reports the distribution as an early distribution, no known exception (IRS code 1 on Form 1099-R), or as a normal IRA distribution if IRA owner is 59½ or older (IRS code 7 on Form 1099-R). After taking this distribution, the individual has 60 days to complete the indirect rollover.
An IRA owner needs to find out from the plan administrator or trustee of the employer’s QRP under what circumstances the employer’s QRP will accept rollovers of traditional (including SEP) or SIMPLE IRA assets. Next, the IRA owner should discuss strategies with his/her tax professional, financial planner or legal counsel prior to executing the rollover. Following these steps will lead to a successful IRA-to-QRP rollover.
For an opportunity to learn more about IRAs and other tax-advantaged accounts including Health Savings Accounts and Coverdell Education Savings Accounts, consider our on-demand video training offered on a variety of topics. Go here to learn more about training opportunities available to you, or you can call us at 1-800-552-9408.