Roth individual retirement accounts limit how much you can contribute each year. In 2013, these limits increase to $6,500 if you're 50 and older and $5,500 if you're younger than 50. Even if you've rolled money over during the year, including using a rollover to convert money to your Roth IRA, you don't have to miss out on your annual contribution.
Rollovers Don't Reduce Limit
Rollovers don’t count against your contribution limit for the year, so you don’t have to worry about recalculating your contribution limit. For example, if you take a $15,000 distribution from one IRA and roll it into another IRA, that $15,000 deposit doesn’t count against your annual contribution limit for the year. For the 2012 tax year, you can put in $5,000 if you’re under 50 and $6,000 if you’re 50 or older. In 2013, these limits go up to $5,500 and $6,500.
If your modified adjusted gross income is too high, you can’t contribute to a Roth IRA. There’s no income limits for rolling money into a Roth IRA, so just because you were eligible for a rollover doesn’t automatically mean you can also contribute. For example, in 2012, your maximum contribution starts dropping when your MAGI exceeds $110,000 and is completely phased out at $125,000. For married couples, the limit starts declining at $173,000 and phases out at $183,000.
Roth Conversion Income
The income that comes from a Roth IRA conversion won’t jeopardize your ability to contribute to a Roth IRA either. The modified adjusted gross income formula allows you to subtract out any income resulting from a Roth IRA conversion for the year. Suppose your adjusted gross income for the year is $130,000, but you converted $30,000 from a traditional IRA to a Roth IRA during the year. For the purposes of determining your Roth IRA MAGI, your exclude the conversion income so your MAGI is only $100,000.
Still Need Compensation
Though you can do a rollover from one IRA to another, or even a conversion to a Roth IRA, without compensation, you need it if you want to make a contribution. Compensation includes taxable income from alimony or your job, whether that’s an hourly wage or self-employment income. If you only have unearned income, like pension payments, capital gains or dividends, you aren’t eligible. But, if you file a joint return, you can use your spouse’s compensation left after her IRA contributions to make an IRA contribution for yourself.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."