Roth IRA contribution over income limit

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Joined: Mon Sep 19, 2011 1:57 pm

Roth IRA contribution over income limit

Post by charles_shaw » Tue Dec 23, 2014 1:08 pm

Just want to run by this scenario with some other minds to verify I have my thinking straight:

In early 2014 I contributed $5,500 to my Roth IRA as I have for the past few years.

Around mid 2014 I switched jobs into a Megacorp for a significant salary increase which puts me over the income limits for Roth IRA contributions.

I believe I have two options now:

1) Recharacterize the Roth IRA contribution this year to a Traditional IRA
2) Withdraw this years contribution (it has just sat in cash so it has no earnings to pay taxes on)

However, if I recharacterize, is it possible to rollover this new Traditional IRA into a Roth IRA (thus completing the circle and ending up back in my current situation?)

I am also doing a backdoor Roth IRA conversion from my after-tax 401k contributions this year, but I don't think that interferes with the options to fix my $5,500 Roth IRA contribution.

Is there an advantage to Recharacterizing vs just withdrawing the contribution?

Alan S.
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Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Roth IRA contribution over income limit

Post by Alan S. » Tue Dec 23, 2014 1:32 pm

If you have no other non Roth IRA balance, you would recharacterize the Roth contribution to TIRA and then convert it tax free back to a Roth IRA. If you DO have other non Roth IRA balances, then your conversion would be mostly taxable and you would only benefit from it if you would otherwise have benefited from a taxable conversion. You could also remove the excess with no tax or penalty (no earnings), but you would then lose your IRA space for the year if you did not recontribute by 4/15.

The roll over of your 401k after tax sub account will only affect the above IF you are rolling the earnings in that account to a TIRA per Notice 2014-54. If the earnings are real small you could roll the entire balance to your Roth and pay taxes on the small amount of earnings and that would not affect the TIRA tax free conversion.

There are also timing issues since 2014 is about history. If you converted the TIRA this year but did not do the 401k rollover until January, then any portion of that you sent to a TIRA would not be in the 12/31/2014 non Roth IRA balance and your TIRA conversion would still be tax free for 2014.

Finally, if you DO have a non Roth IRA balance that would affect back door Roth IRA conversions, you could roll the pre tax non Roth balance into your 401k plan if the plan will accept IRA rollovers. Then the pre tax non Roth balance would no longer exist and you could make non deductible TIRA contributions in the future and convert them right away tax free.

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