The Roth IRA is a retirement savings vehicle that is almost too good to be true. Though contributions come from after-tax money, withdrawals at retirement age are tax-free. In addition, you can keep contributing to a Roth until the end of your days and never have to take a single distribution. These features induce many working taxpayers to roll money from other retirement accounts into a Roth.
Eligible Retirement Accounts
You can move money from nearly any retirement account into a Roth. The list of eligible account types includes the 401k, 403b, 457 plan, traditional IRA, SIMPLE IRA and SEP-IRA. You can even roll money from your employee profit-sharing, money purchase and defined benefit plans. You cannot, however, roll into a Roth from another retirement plan a required minimum distribution, a loan or a hardship distribution.
There's no limit on the amount you can roll to a Roth from another retirement account. However, a Roth rollover is a taxable event. Traditional IRAs, 401k plans, 403b plans and 457 plans are typically composed of pretax dollars. Roth IRA contributions come from after-tax dollars. So when you effect the rollover, you have to pay taxes on the money that was originally in a pretax account.
Tax Bracket Change
Rollover contributions are declared as income when you file your return. Consequently, you have to take care that your rollover does not push you into a higher tax bracket. As of 2012, adjusted gross income of $75,000 puts you in the 28 percent bracket. A rollover of $20,000 will push you into the 33 percent tax bracket.
What you can do to avoid paying a higher tax rate is to effect a partial rollover of the total amount you want to move over a number of years. The upper limit for the 28 percent tax rate is $83,600. So continuing with the above example, if you want to move that same $20,000 into your Roth without increasing your tax rate, you can move $7,000 each of the first two years and $6,000 in a third year.