How much can you roll over into a Roth IRA?

There’s an art to planning for retirement.

Regardless of your retirement goals and strategies, small changes today can lead to massive differences down the road. And with so many investment options available, it can all feel a bit overwhelming.

Many workers take a more traditional approach by using an employer-sponsored retirement plan. They might open a 401(k) through their employer and contribute funds from every paycheck, assuming they’ll be good to go once they’re ready to retire.

And on some cases, that approach works just fine. But when you consider the eventual impact of using these tax-deferred retirement savings accounts, the devil is in the details.

Many times, people are confused about the difference between a Roth IRA and a traditional IRA. While a traditional IRA (Individual Retirement Account) gives you a tax break today (though not all tax deductions will be allowed) by not taxing contributions until you withdraw funds, that means you end up paying taxes on both the money you’ve invested and the interest you earn. Since a Roth IRA only taxes your contributions (made with after-tax dollars) in the tax year of contribution, you don’t end up having to worry about paying taxes on any gains when you withdraw money in retirement.

Truly savvy savers understand the importance of thinking through their tax situation to ensure they can eventually enjoy the sort of retirement they’ve always dreamed about. And one of the best ways to benefit from tax-free withdrawals in retirement is via a Roth IRA conversion.

In fact, some high-income individuals who earn too much to contribute to a Roth IRA are able to use conversions as a creative way to benefit from this investment option — through what is sometimes referred to as a backdoor Roth IRA.

In this post, we’ll take a closer look at Roth IRA conversions, the ins and outs of the conversion process, and how converting your assets could save you a lot of money in retirement. Read on to answer any questions you might have about Roth IRAs.

How do Roth IRA Contribution Limits Affect Roth Conversions?

As with most investment options, Roth IRAs carry their fair share of rules set and governed by the Internal Revenue Service to prevent people from abusing the tax benefits of these accounts.

IRS regulations only allow people to make after-tax contributions to Roth IRAs in 2024 if they make less than $161,000 as an individual or $240,000 for married couples filing jointly. There are, however, no income limits with regard to Roth IRA conversions. 

Although there are limits with regard to how much you can contribute to a Roth IRA each year — the annual contribution limit in 2024 is $7,000 for anyone under 50 and $8,000 for anyone 50 and older — there are no restrictions regarding how much you can convert from a traditional IRA, Simple IRA, or 401(k) to a Roth IRA. Still, there are some important tax consequences to remember when making Roth IRA conversions.

For starters, each Roth IRA conversion from a tax-deferred account is considered a taxable event. Whether it’s a direct rollover or an indirect rollover, you’ll owe taxes on the amount converted in the year you make a conversion. Based on the size of the conversion and your other income sources, this rollover to a Roth account could end up pushing you into a higher tax bracket.

Another thing to keep in mind is how Roth conversions can impact other aspects of your larger financial strategy. Say your child is getting ready to enter college, and you’ll be helping them apply for financial aid. Roth IRA conversions could increase your income for a given tax year, which might end up reducing your family’s eligibility for financial aid.

Finally, you must consider that the five-year rule for Roth IRAs also applies to Roth conversions. If you’re younger than 59 ½ and take IRA distributions within five years of a conversion, you’ll end up paying taxes on the earnings portion as ordinary income and be subject to a 10% early withdrawal penalty. The five-year clock starts ticking on January 1 of the year you made a conversion, but each one begins its own countdown if you make multiple conversions.

How Do Roth IRA Conversions Impact My Taxes?

When you convert money from a traditional IRA to a Roth IRA, you might end up paying taxes on the amount you convert between IRA accounts. The taxes you owe on those funds will depend on your taxable income and tax rate at the time of the conversion.

To calculate your tax bill, you must first know which income tax bracket you fall into. If your income already is taxed at a higher rate — rates in 2024 range from 10% to 37% — the tax implications will be more severe for those rollover funds.

Your chosen conversion amount, which is considered a distribution from your retirement account, is added to your gross income for the given tax year. Here, the conversion could unintentionally push you into a higher tax bracket for the year — which means a higher effective tax rate.

Say you’re in the 24% tax bracket and decide to convert $30,000 from your traditional IRA to a Roth IRA. Provided this move doesn’t land you in a higher tax bracket, you’d end up owing about $7,200 in taxes on that conversion (ignoring deductions).

Those taxes could be worth it today if it means you’re able to enjoy qualified distributions in retirement — meaning they are tax-free and incur no early withdrawal penalty — when you could potentially be in a higher tax bracket than you’re in now.

While IRA conversions can be a valuable way to boost your retirement savings, they can carry significant tax consequences. And if you’re rolling over retirement funds from a pre-tax employer-sponsored plan like a 401(k), it’s generally advisable to roll the money into a traditional IRA first before attempting a Roth conversion.

How to Start the Rollover Process

If you think a Roth IRA conversion might be the right choice for you, it’s time to navigate the IRA rollover process.

While the IRA rollover process is relatively straightforward — it always starts with opening an IRA — it can vary slightly depending on whether you’re making a direct rollover or an indirect (60-day) rollover. Let’s learn more about these two approaches to retirement plan distributions.

Direct IRA Rollovers

A direct IRA rollover involves moving funds from one retirement account to another without incurring any tax penalties or other consequences. The IRS allows direct rollovers between accounts, such as from one IRA to another IRA or from a 401(k) to an IRA.

With a direct rollover, the funds are transferred directly between financial institutions. As the account holder never actually handles the money, those funds are not subject to taxes or penalties, and there is far less risk involved.

A direct IRA rollover can be initiated by contacting the bank or financial institution and asking them to move the money for you. You can also ask your former employer to transfer funds from your work retirement account to your IRA.

Indirect IRA Rollovers or 60-Day Rollovers

Meanwhile, an indirect rollover inserts the account holder into the process. The individual receives a distribution directly, and they then have 60 days to deposit their entire pre-existing balance (before tax withholding) into another tax-advantaged retirement account. It can be costly if you fail to re-deposit your funds.

With an indirect rollover, individuals who do not complete the rollover process within that 60-day time frame are subject to taxes and penalties. The distribution from the original account is considered ordinary income, and it is taxed at the individual’s income tax rate. Moreover, that person also faces a 10% early withdrawal penalty if they are younger than 59 ½ years.

Indirect rollovers can be a useful option if a direct rollover is not available or if a person needs to use those funds briefly before transferring them to a new account. Note that the IRS limits people to one indirect rollover every 12 months.

Can You Save Money by Converting Assets to a Roth IRA?

Converting assets to a Roth IRA can be a savvy financial decision for anyone looking to diversify their retirement plan tax strategy and/or save money in the long run. Roth conversions allow for tax diversification by giving folks a way to withdraw tax-free funds in retirement, but they have even more benefits, too.

With a traditional IRA, account holders are subject to required minimum distributions (RMDs) in the year they reach age 73. Because Roth IRAs do not have RMDs, this means you’re not forced to withdraw funds from the account at any point. This can be particularly helpful for people who do not need those funds immediately or who would prefer to let them grow tax-free for as long as possible.

Certainly, there are downsides to a Roth conversion. Rolling assets from a traditional IRA to a Roth IRA involves paying taxes on the full amount of the conversion, which can make a big difference as it relates to your tax return and potential tax refund.

But if you expect to be in a higher tax bracket during retirement than you are currently, a Roth IRA — or even a Roth 401(k) — conversion can both diversify your retirement plan and potentially save you money in the long run.

FAQs

Is there a limit to roll over a 401(k) into a Roth IRA?

Thankfully, there are no limits in terms of how much money you can roll over into a Roth IRA. The only thing limiting how much you might want to convert from your tax-deferred retirement accounts to a Roth IRA either on your own or through a trustee transfer would be the tax implications of doing so in a penalty-free manner.

How much money can I roll over from a 401(k) to a Roth IRA?

If you’re looking to take funds from your employer-sponsored 401(k) account and roll them into a Roth IRA, you’re also in luck. Regardless of where the funds are coming from, the IRS has no limits regarding how much money you can roll over or convert into a Roth IRA.

Can I put $100,000 in a Roth IRA?

You’re free to convert as much money into your Roth IRA as you please, but you can only directly contribute up to $7,000 in 2024 if you earn less than $240,000 as a married couple filing jointly — or $161,000 for an individual; that limit rises to $8,000 if you’re 50 or older.

As your income increases above those thresholds, the amount that you’re able to contribute to your Roth IRA phases out. An individual who earns between $146,000 and $161,000, for instance, would be able to contribute a reduced amount to a Roth IRA. But once they earned more than $161,000 in a tax year, they would no longer qualify for direct Roth IRA contributions.

Can I roll my entire IRA into a Roth IRA?

You can transfer some or all of your existing traditional IRA or other employer-sponsored retirement accounts into a Roth IRA, regardless of your income. If you’re moving funds from a pre-tax account, like a traditional IRA, to a Roth IRA, this is considered a conversion — not a rollover. You’ll want to consider the tax implications of this conversion carefully, however, as that pre-tax distribution can bump taxpayers into a higher income bracket for that given year.

Need Help Managing a Roth IRA Rollover?

Whether you’re looking to convert your 401(k) or IRA into a Roth IRA — or maybe both — there’s thankfully no limit to the amount you can roll over to this tax-advantaged retirement plan. But that doesn’t mean the process is a walk in the park.

Between figuring out potential income tax implications with your tax advisor and coordinating logistics with your plan administrator, managing a Roth IRA rollover can present tremendous headaches. Further complicating matters, this process tends to come during times of significant change — you might be changing jobs or retiring from work altogether.

Thankfully, you don’t have to do it all on your own. By working with a partner like Capitalize, you can take the guesswork out of the process and rest comfortably knowing that your IRA rollovers are in expert hands.

Our expert team makes it easy to roll your existing retirement accounts into a Roth IRA. In as little as five minutes, we can take over your entire rollover — handling everything from start to finish.

To see how we do it and start rolling your retirement funds into a Roth IRA, click here to get started!