What are the Roth IRA rollover contribution limits?
I have a 401(k) plan with my employer. I have two separate, but related queries:
I am over 50 years old and plan on using the 401(k) catch up provision ($24K) for 2017. When I retire, what is the contribution limit for a rollover to existing Roth IRAs? Can I rollover (backdoor) my 401(k) (spouse is retired) into both Roth IRAs (mine and spouse), even though our joint AGI (line 15 of 1040) will exceed the IRS annual limit for IRAs? I have had the two Roth IRAs for more than 15 years.
I contributed funds (both IRAs) to the max Roth IRAs limit ($6,000 each) for 2017. I recently received a promotion. Can I withdraw the Roth IRA contributions now without IRS penalty? My 2017 AGI will now exceed the IRS annual limit for IRAs.
Good planning on your part, now let's break this down.
1) There is no limit on Roth conversions or rollovers from a Roth 401(k) to a Roth IRA, so you are all set there.
2) A backdoor Roth refers to a non-deductible traditional IRA contribution with an immediate conversion to Roth. The important thing to note is this looks at all IRA assets at an individual level, meaning that if you have some money in one IRA(pretax), then have another IRA (Or Sep, or Simple). The basis will be looked at in its entirety and you will be taxed on a pro rata basis. This however, does not take into consideration funds held in 403(b) or 401(k) accounts. If you have a pretax IRA, it is best to roll it into your 401(k), then you would not have the basis taken into consideration. Take a look at this excellent guide from Michael Kitces https://www.kitces.com/blog/the-impact-of-the-ira-aggregation-rule-on-after-tax-distributions-roth-conversions-60-day-rollovers-rmds-and-72t-payments/
3) The IRS limits affects the deductibility of IRA contributions, not the ability to make them. Based on your question about the back door Roth, this is likely an option, but would be affected by outside IRA assets owned by your wife (as you could put your own in your current 401(k)). You can effectively cancel the Roth contribution you made, contribute to a traditional IRA (non-deductible), then convert to a Roth.
This situation and many others like it are quite complex and usually take coordination of both a financial planner and accountant so that things won't slip through the cracks. Please reach out if you need more personalized assistance, and good luck!
Please note that the information above is not a recommendation and is for informational purposes only.
There's quite a bit going on here and I'll try to itemize the issues:
The first part of your question:
1) Rolling a 401(k) to a Roth IRA isn't a backdoor Roth, it's just a simple conversion.
2) There are no limits to Roth conversions, you simply pay tax at ordinary income rates on any amount you convert. You'll need to carefully evaluate where you are now versus where you think you'll be in the future, before executing large Roth conversions.
3) You can only convert your 401(k) to your own Roth, not your spouses.
4) There is no income limit for Roth conversions.
5) How long your Roths have been opened is irrelevant in regards to rollovers or conversions. Only withdrawals matter in regards to how long a Roth has been funded.
Now, on to the second part of your question:
1) The annual Roth contribution limit is actually $6,500 for someone over age 50.
2) You can withdraw your contributions, but will pay tax and penalty on any earnings in excess of your contributions. I would be curious as to what you think the IRA phaseout limit is versus what your actual MAGI is, you could be missing something there. There's a higher AGI limit for Roth IRAs and spousal IRAs (assuming your wife doesn't have access to an employer retirement plan).
3) You can recharacterize the contributions to a traditional IRA, not claim a deduction, and then convert them to the Roth (this is a backdoor contribution, but you would pay tax on the earnings).
No offense, and I say this only for your benefit, but I would consult with a financial advisor or a CPA. You seem to "know enough to be dangerous," as the saying goes, without having a firm handle on exactly what you can or can't do. It can get fairly complicated and it's also why a real financial advisor is worth it. There's a lot of things you're trying to do that can get you into a mess of tax and IRS trouble, so tread very cautiously.
Good Morning! These are good questions.
1) Moving (rolling) the Roth 401(k) to the Roth IRA is common and there are no limits. This is totally separate from a Back-door Roth. Neither of these are contingent on your AGI.
2) A backdoor Roth is making non-deductible contributions to an IRA or 401(k) and then doing a tax-free Roth conversion. The only rub is there are pro-rate rules if you have existing tax-free funds in any IRAs, then the IRS assumes a proportional distribution. If you are looking for another way to save, this can be great!
3) I hope I understand you correctly that you are moving money from your IRAs to the Roth IRAs. This would be a conversion and would be taxable, but can be done. I have found it is good for clients to have access to both pre-tax and post-tax funds in retirement.
4) You can withdrawal the Roth contribution without penalty for the Roth IRAs, but I would consider just cutting back on some of your contributions rather than touching it.
Mark Struthers CFA, CFP®
Congratulations on the promotion. These are good problems to have!
There are several questions asked here and possibly other questions I think you might be asking, but let's start at the beginning.
Yes, when you stop working, you would be able to roll over the entire account to an IRA. There are two types of IRAs: Traditional, which is taxed later, and Roth is taxed now, but never again in the future.
- In your case, a traditional IRA would function very similarly to the 401(k) for tax purposes, but usually the IRA offers more distribution options and investment vehicles than most 401(k)s.
- As for rolling to a Roth IRA, you could do this as well, but this is what is known as a conversion, not just a plain rollover. As the law currently reads, it is possible to do a conversion on any amount of money from a 401(k)/Traditional IRA account into a Roth, but the taxes on the full amount being converted become due on conversion. This means you would add your entire 401(k) balance to your annual income for taxes for that year. EXAMPLE: if you made $240,000 for the year and your 401(k) is $800,000, the IRS would say you owed taxes on $1,040,000 of income! That would potentially be a large loss to taxes.
Additionally, you would NOT be able to roll any of your 401(k) into your spouse's IRA, Roth or traditional, because the money is attached to your name. IRAs and 401(k)s are similar to a trust, the money is tied to only that person. You would have to cash it out and then could make a contribution to her account, but it would be limited to the $6,500 annual contribution (it has gone up in recent years).
On the last question, you can and need to withdraw the money you contributed for the year soon, assuming it was into a Roth IRA. Doing so will trigger a tax on any gains, but you will avoid any penalties (See more here on the specifics https://www.irs.gov/publications/p590a/index.html ). You could instead contribute that money to a traditional IRA for the year, but it would likely not be tax deductible in your tax bracket.
Honestly, considering your new AGI, your proximity to retirement, and the varied tax class of your assets, it would be a good idea to consult a qualified fiduciary financial/ tax planner. You've got a lot going on and small mistakes can really cost you on some of the moves you're contemplating.
First of all, the contribution limits for a IRAs (Roth or Traditional or in combination) is $6,500 for 2017, if over 50, not $6,000. Your 401(k)ss, IRAs, etc., must remain in your own styled accounts because all retirement accounts are "individual" retirement accounts, so you could not place or roll some of your 401(k) assets into your spouses Roth.
There are no limits to rollovers or backdoor IRA rollovers, IRA to Roth not 401(k), and the AGI limits apply to contributions only. You can always take out contributions from a Roth anytime penalty and tax (because no deduction going in) free. And if you are over 59 1/2, you can take out earnings tax free. If under age 59 1/2 and because you have met the 5 year rule, earnings will only be subject to tax, but no penalties. I have attached a link to Charles Schwab explaining distribution rules for Roth IRAs. There are others, but this is the most concise explanation I have found.
Regarding the conversions, I recommend you speak with someone well versed in planning or your CPA so you pay the least amount of taxes going forward. But you are on the right track and with good planning, you should be able to control where and how you take distributions, taxable or otherwise, so as to minimize your taxes. One alternative is to use Roth contributions that are tax free and then earnings after 59 1/2. As you get closer to 70 1/2 and are required to take MRDs (minimum required distributions) for traditional/rollover IRAs, you will want to manage these distributions by spreading out and minimizing the taxable ones. One consideration that will affect your planning is what you think the possible tax rates will be going forward.
You are on the right track though and asking the right questions. Now you just need a good investment strategy (not products) along with an estate plan and you will be all set with a comprehensive financial plan.
Best of luck, Dan Stewart CFA®