401(k) Roll Over to Roth IRA Contribution Limits

You can roll over as much of your 401k as you like, but you will owe taxes on the money.

The Internal Revenue Service (IRS) has plenty of rules regarding rollovers, but one thing is clear: there is no limit on how much money you may contribute to a Roth individual retirement account (IRA) from a 401(k).

Significance

The IRS distinguishes between rollovers and IRA contributions. Even though the 2010 contribution limit for Roth IRAs is $5,000 ($6,000 for people over 50), the year you roll over a 401(k) you are eligible to make the maximum allowable Roth IRA contribution.

No Roth IRA Rollover Limits

If you wanted to roll over your 401(k) to a Roth IRA prior to 2010, you could not earn more than $100,000. The cap was the same whether you filed singly or jointly. There are no such income limits now.

Roth IRA Contribution Limits

Though there are no rollover limits, the IRS still enforces an income limit for contributing to a Roth IRA. In 2010, the income cap for making a full Roth IRA contribution is $167,000 for joint filers and $105,000 for single filers.

High-Earner Rollovers

When the IRS eliminated the income limit on rollovers, it also provided a loophole for those who make too much to contribute to an IRA. These people can now open a non-deductible traditional IRA, which does not have an income cap, and roll their 401(k) funds into that. Then they can roll the non-deductible traditional IRA into a Roth IRA.

Taxes

While 401(k) contributions are not taxed, Roth IRA contributions are. Therefore, you must pay taxes on the conversion the year of the rollover.

References

• Fairmark.com: Conversion Eligibility
• Good Financial Cents: Can You Rollover Your 401(k) to a Roth IRA?
• Investopedia: Must-Know Rules For Converting A 401(k) To A Roth
• IRS.gov: Topic 413--Rollovers From Retirement Plans