There is a little confusion out there regarding Roth IRA contribution limits and rollovers. Complicating matters is that contribution limitations are different for a Roth 401(k) and Roth IRA. For a Roth IRA in 2017, you are limited to $5,500. For those age 50 or older, the limit is $6,500. However, there are phase outs based on modified adjusted gross income (MAGI). If your MAGI is over the limit, you can be excluded from contributing to a Roth IRA. The chart below is from the IRS website and provides more detail as to how this could affect your ability to participate.
This is very different for Roth 401(k) contributions. These limits are much higher. The limit for a Roth 401(k) in 2017 is $18,000 and $24,000 for those age 50 or older. There is no income limitation to contributing to Roth 401(k) as there is with a Roth IRA.
Roth IRA contribution limits do not apply to rollovers. There is no limit on rollover amounts whether to a Roth IRA or Traditional IRA assuming they are to like accounts (Roth 401(k) to Roth IRA or Traditional 401(k) to Traditional IRA). There are ways to do a “back door” Roth IRA contribution to avoid the limitation on income. This “back door” involves making a contribution to a non-deductible IRA, then converting those dollars to a Roth IRA. However, you need to be very careful with this. There are special rules in place that can be a mine field to navigate. I wrote about this in my article Roth IRA Conversions – The Pro Rata Rule Is Lurking.
Roth IRA Contribution Limits – “Borrowing” from a Roth IRA
Contrary to popular belief, there is no “borrowing” from Roth IRAs or Traditional IRAs. There are only distributions. “Borrowing” from a Roth IRA or Traditional IRA is a misconception likely due to the ability to borrow from some 401(k) plans. This is accomplished via a 401(k) loan. I wrote an article about 401(k) loans called 401k Loan – 3 Reasons Not To Borrow that goes into more detail.
With regard to Roth IRA distributions, there are ways to access the funds, but it’s not borrowing. Borrowing implies that you can pay it back. You can’t pay back distributions taken from Roth IRAs or Traditional IRAs. There is an exception for distributions from an IRA that are paid back within 60 days. However, that is a totally different subject and it is also a commonly misunderstood rule.
Roth IRA withdrawals (distributions) of principal are tax and penalty free. The reason is that contributions are made with after tax dollars. The IRS has already taken their bite with regard to the principal (what you contributed). The earnings are a different story. While there can be exceptions, early withdrawals can be subject to taxes and penalties that are attributable to earnings (not principal). If you’re looking to take a withdrawal from the Roth IRA due to education, first time home purchase, or to help with a disability, you should definitely read up on the exceptions.
Early withdrawals are those made prior to age 59 ½. Withdrawals made after age 59 ½ and after having the account for at least five years will allow for withdrawals that are tax and penalty free. I wrote an article called Roth IRA – 5 Things Retirement Savers Must Know that covers other important considerations of investing in a Roth IRA.
Proceed with caution when planning your rollovers or distributing from a Roth IRA. There is often more to the process than meets the eye.