Roth Rollovers - are there downsides?

Timing can be everything when you’re deciding whether to roll-over your Roth. As a reminder - the reason why Roths are preferred-retirement vehicles for many taxpayers is because any growth that occurs is tax-free. Additionally, any contributions you make can be removed at any time without penalty or tax.

What’s the catch? Well, there are income limits that will prevent some high-earners from contributing, as well as annual contribution limits for those who can. If your income is over $153k in 2023 – or $228k if you’re married and filing jointly – then you are not allowed to contribute to a Roth IRA. Even if you meet the income limits, you are still limited to the annual contribution limits, which are the same as those for a traditional IRA: $6,500 for 2023, or if you’re 50 years old or older you can contribute $7,500.

One way around these limits is rolling over a traditional retirement account into a Roth account. Be aware - you will pay income taxes on the amount you roll-over, but this also means that all future-growth on the account is tax-free. The more years you have until your withdrawals begin, the more growth you will have that is tax-free.

The final “downside” I want to point out is the exception to the tax-free growth advantage: Roth IRA Conversions have a 5-year rule, which means that you cannot access any of the earnings on your funds (ie interest, dividends, capital gains) for five years without incurring tax. This means a roll-over might not be your best option if you need to access the funds within that initial 5-year time period.

If a Roth IRA or Rollover Roth sounds like a good strategy for you, you should discuss this with your accountant or tax preparer first to make sure you qualify and understand all of the rules.