 Rollovers
and Roth IRA contributions
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 Dear
Dr. Don,
I'm 25 and just left my job of two years to go back to graduate
school. I was participating in my company's 401(k) plan and
had accumulated approximately $2,000 over the last two years. I
rolled the 401(k) into an IRA, and then I converted the Rollover
IRA to a Roth IRA.
My question is fairly straightforward, but I have
been unable to find a straightforward answer. I've searched both Bankrate and
IRS Publication 590 to no avail. Quite simply, does the $2,000 conversion
count against the $4,000 contribution limit for 2006? Or can I still contribute
an additional $4,000 on top of the amount already converted? I am married
(filing joint taxes) and our adjusted gross income is below $100,000 for 2006.
-- Jonathan Juncture
 Dear
Jonathan,
The rollover from a 401(k) plan to an IRA rollover
and the subsequent conversion contribution to a Roth IRA in this
tax year does not count against your contribution limits to a Roth
IRA for the current tax year.
Your participation in your employer's 401(k)
plan for any portion of the current tax year may limit your ability
to make tax-deductible contributions to a traditional IRA this year
if your earnings exceed $80,000 -- the threshold for married persons
filing jointly in 2006. IRS Publication 590, Individual
Retirement Arrangements, discusses this limitation.
You
can contribute to a Roth IRA, provided you fall within the income limitations,
regardless of whether you have a retirement plan at work. Here's what Publication
590 says about contribution limits. Generally, you can contribute
to a Roth IRA if you have taxable compensation and your modified AGI is less than:
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Roth IRA contribution requirements | |
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The crux of your question is whether rollovers limit
contributions. They don't. According to Internal Revenue
Code (IRC) Section 408A(c)(6)(B), qualified rollover contributions
do not count toward the annual maximum contribution limit applicable
to Roth IRAs.
I didn't find this explicitly stated in Publication 590. Instead I asked
Jim Ivers III, and David Littell, tax professors at the American College, to review
your question as it pertains to the IRC.
To ask a question of Dr. Don, go to the "Ask
the Experts" page and select one of these topics: "financing
a home," "saving & investing" or "money."
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