How would rolling over my 401(k) to a Traditional IRA affect my contribution limit for 2017?
I am leaving my job with an employer sponsored 401(k). I want to roll that over to a traditional IRA without cashing out anything. I have approximately $16,000 in the 401(k) and I already have a Roth IRA with about $1,700 contributed for the year. What happens when I rollover my 401(k), can I still contribute to my Roth up to the $5,500 for the year? Or do I have to stop for the year due to the adding of money into a new retirement account? I'm 27 years old and married if that helps.
Your rollover from the 401(k) plan to an IRA rollover stands as a single and separate transaction. It will have no effect on your contribution limits to a new employer's 401(k), and/or a contribution to a Roth IRA. You should be entirely safe to make this transaction without any concern about interfering with the current 2017 contribution limits to other plans. I hope this helps and good luck.
Before you roll over the old 401(k), ask your new employer if they accept any previous 401(k)s. If they do, check out the investment menu. Make sure that it provides what you need, solid funds with low cost. Only then, do the direct transfer. On the other hand, if the new 401(k) menu offers higher cost and unrecognizable funds (check each one on the Morningstar website to see the ratings on those funds), do the rollover to an IRA. You can invest on your own or work with a professional.
A rollover on a 401(k) has NO effect on your contribution to an IRA. However, it does affect people who do the two-step conversion. Instead of a clean conversion, the person may need the CPA/CFP's help for the pro rata calculation during the tax time.
For example, if a person who does not have any IRAs, but his/her income is too high to make a direct contribution to a Roth, he/she can do the two-step conversion by first making a contribution to a non-deductible IRA, then immediately converting to a Roth without any tax consequences. However, if the same personal suddenly changes a job and decides to do a rollover of the old 401(k) to an IRA, then there may be a tax consequence for that conversion. Say, he/she rolls $16K of a 401(k) to an IRA, instead of the usual clean conversion of $5,500, he/she must calculate the exclusion amount for the new conversion. The $5,500 non-deductible IRA only represents 26% exclusion [$5,500 / ($5,500 + $16,000)] when converting to the Roth. It could get more complicated from there.
So, watch out for those details and keep a good record. Better yet, consult with a CFP® to get a second opinion. Best!
A rollover does not count towards your contribution limit. You can contribute up to $5,500 per year as long as your income does not exceed certain thresholds. Check out “Amount of Roth IRA Contributions That You Can Make For 2017” on the IRS.gov website for information about contributions and limits.
I applaud you for being so proactive on the retirement savings front at age 27!
It's a common misconception that your rollover affects your eligibility to contribute to an IRA in the same year. You should think of them as two completely separate accounts with nothing to do with each other. The IRS understands that the origin of the rollover is from an employer plan that has no income limit and allows an annual contribution of $18,000. If you are eligible to make a Roth IRA contribution based on your income and marital status, then you can do so regardless of the rollover.
|Roth IRA Income Limits (for married filers)||Phase-out starts at $184,000; ineligible at $194,000|