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Q: After leaving an employer a few years back, I moved over my 401(k) to a rollover IRA. Today, in addition to that rollover IRA, I also have a Roth IRA. I’ll turn 50 this year, so I’ll be able to put away up to $7,000.
Am I able to contribute to both the rollover and Roth IRA a combined total of $7,000, or just $7,000 to the Roth? When I try to contribute to the rollover I am asked if this rollover was from an employer-sponsored plan. Since it was, does it throw off how much I can contribute to either plan? Thank you for considering my questions.
— M.V. from Ohio
A.: Thanks for asking the question. IRA contribution season this year extends to July 15 from the usual April 15 due to COVID-19.
A “rollover” IRA is a label attached to a traditional IRA. Most people do not split the contribution because they prefer the tax treatment of one over the other but you can split the $7,000 between a traditional IRA and a Roth in any proportion you like as long as your income fits the eligibility criteria.
There is no tax deduction for a Roth contribution, but earnings can be tax free when distributed. If your Modified Adjusted Gross Income (MAGI) for 2019 is under $122,000 (single filer) or $193,000 (joint filers), you can choose to put all $7,000 ($6,000 regular contribution limit + $1,000 catch-up contribution for being over age 50) into a Roth IRA. Above those income limits a partial contribution is permitted but If your MAGI is above $137,000 as a single or $203,000 as a couple, no Roth contribution is allowed.
There is no maximum MAGI limit for contributing to a traditional IRA but earnings are taxed as ordinary income when distributed. However, there are income limits that affect whether you can deduct the contribution to the traditional IRA if you or your spouse participate in a qualified plan like a 401(k). If neither of you are a participant, whatever you contribute to the IRA is fully deductible. If you are a participant, see this IRS chart for the deductibility limits. If your spouse is a participant, see this chart.
These days, for most taxpayers, the designation of an IRA as a rollover IRA is not important but here are two situations in which the designation matters.
First, some employer-sponsored qualified plans like 401(k)s will only accept incoming rollovers of money that was in another qualified plan or a rollover IRA containing only money from a qualified plan. If a roll-in to a new qualified plan is not in your future, contributing to the rollover IRA should not be an issue but if you want to preserve the rollover status, just open a second IRA and contribute to that.
Second, in some states IRAs provide less creditor protection than applies to qualified retirement plans like 401(K)s. Keeping funds rolled out from a qualified plan in a rollover IRA segregated from other IRA assets can preserve the more extensive creditor protection of the qualified plan. This chart is a good place to start to understand the difference in your state if that is a concern.
Thanks for asking the question but please note I’ve only touched on a few quick points here. You should discuss the details with your adviser.
If you have a question for Dan, please email him with ‘MarketWatch Q&A’ on the subject line.
Dan Moisand is a financial planner with Moisand Fitzgerald Tamayo. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity.
