Rollover IRA/Roth IRA Contribution Limits

21 Jul

Are you Subject to Rollover IRA/Roth IRA Contribution Limits?

Some financial questions are more complex than they first appear, and this is one of them.  Perhaps the question you need to ask isn’t “Are you subject to rollover IRA/Roth IRA contribution limits?” but rather, “Should you implement your own IRA/Roth IRA contribution limits?”
To answer the question as stated, the answer is no – there’s no limit on the amount of qualified retirement funds that you can rollover from a traditional IRA into a Roth account.  Once the Roth IRA is established, however, you won’t be able to contribute more than the IRS specified limit ($5,000 for the 2010 tax year; indexed to inflation every year thereafter), regardless of the type of IRA you select.  For example, if you deposit $3,000 into your traditional IRA, you can only contribute the remaining $2,000 to your Roth IRA.
But let’s take a look at the second question, as there may be a reason to implement your own contribution limits – even if the government doesn’t.  The crucial thing to remember about a Roth IRA rollover is that when money is moved into a Roth IRA from a traditional, tax-deferred retirement account, you will be required to pay ordinary income taxes on the money being rolled over.
This is why it may make sense to limit your Roth IRA contributions.  Because the money coming out of your traditional IRA will count as income, rolling over a sufficiently high amount of money could put you into a higher tax bracket when April 15th rolls around the next year.  If, for example, you’re in a 15 percent tax bracket, the additional income from your Roth IRA rollover could push you into a 25 percent tax bracket.  In this case, the government will then take a bigger bite out of all of your income for that year, which could potentially leave you owing money at tax time.
For this reason, it might make better financial sense for you to complete many partial rollovers over several successive years in order to maintain your lower tax bracket than to complete a single rollover during one tax year.  Need to know if the savings are worth the extra hassle?  Sit down with the IRS tax tables and do the math yourself or – better yet – talk with your tax accountant or financial planner.  These professionals can help you determine the best way to complete your Roth IRA rollover.
So although the government doesn’t place a limit on how much money you can transfer between accounts with a Roth IRA rollover, it may still be to your advantage to place personal limits on the amount you move in one year – especially if that money is coming from your traditional IRA.  If you’re considering a Roth IRA rollover and don’t yet have a tax accountant or financial planner, this may just be the perfect time to find one.  Not only can these professionals help you with this financial transaction, they can help you develop a comprehensive financial strategy for all of your retirement savings needs as well.

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