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7/25/2019 Reverse RolloversIn a previous article, we provided info on the Backdoor IRA, which is a technique to help higher earners contribute to Roth IRA’s. In this article, we referenced a way to get around the one limitation with Backdoor IRA’s….. Backdoor IRA’s open up Roth contributions to higher earners by allowing contributions in a roundabout way. However, as mentioned in our previous article on this, the presence of existing Traditional IRA’s can significantly limit the benefit of a Backdoor IRA.
Enter the Reverse Rollover Since Roth conversions with pre-existing Traditional IRA accounts in place activates the “Pro Rata” clause, you can exercise a Reverse Rollover to avoid this Pro Rata clause from crushing your Roth IRA dreams! You’re likely familiar with a Direct IRA Rollover which is common for folks leaving a job. It occurs when you rollover your 401k funds into a Traditional IRA. No tax implications are incurred and you now gain more control over the funds. On the other hand, a Reverse Rollover involves moving funds from a Traditional IRA account into a 401k. This opens up the Backdoor IRA since you would no longer have pre-tax funds in your IRA upon conversion. Other Benefits of Reverse Rollovers
Drawbacks
Remember, if you’re going to execute a Reverse Rollover, be sure it is done with a direct rollover, so your IRA administrator doesn’t cut you a check for the transfer, which then carries a tax withholding requirement. As you can see, the Reverse Rollover may be a vital strategy to your financial plan. Contact us if you have any questions on how this technique can be used for you! Comments are closed.
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