If I cash out an old pension and want to roll it into my Roth IRA, does that count toward the annual contribution limit? Also, how does the IRS track that it’s a pension? For a backdoor Roth, there’s Form 8606—do I need something similar for a pension rollover?
Thanks for any insights!
If you roll over a pension payout into a Roth IRA, it’s treated as a conversion rather than a contribution, so it doesn’t count toward your yearly contribution limit. However, since the pension money is pre-tax, you’ll owe income tax on the full amount.
If they issue a check to you, they will likely withhold 20% for taxes, but that might not cover everything depending on your income. The tricky part is that if you don’t deposit the full amount—including the withheld portion—into the Roth IRA within 60 days, the IRS will treat it as a partial withdrawal, and you could owe a 10% penalty on the missing portion if you’re under 59½.
A better option is to request a direct rollover to a traditional IRA first (avoiding withholding), then decide if and when you want to convert to a Roth IRA later. That way, you have control over when you pay the taxes and can spread the conversion over multiple years if needed.
@Paige
If I get a check, deposit it into my bank account, and then contribute it to my Roth IRA, does that work even if I’m above the Roth income limit? I normally do a backdoor Roth, so would this work the same way?
@Dexter
Yes, but you’ll need to make sure the entire pension payout (including the withheld amount) is deposited into your Roth IRA within 60 days. Otherwise, the withheld portion will be treated as a taxable distribution with a penalty.
Since this is a conversion, not a contribution, the Roth income limit doesn’t apply. But you still owe taxes on the amount converted.
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